DragonSwap, which is linked to the kimchi coin Kaia ecosystem, has been found to have exchanged stablecoins for Koreans and continued promotional activities without a Virtual Asset Service Provider (VASP) license, raising allegations that it violated the Act on Reporting and Using Specified Financial Transaction Information.

According to the virtual asset industry on the 6th, DragonSwap provides a service that exchanges the dollar stablecoin "USDT" and the yen stablecoin "JPYC." The mainnet infrastructure is Kaia. DragonSwap charges users a fee in the process of exchanging the two stablecoins.

DragonSwap is a decentralized exchange (DEX) in the Kaia ecosystem. Users can take part in token swaps, liquidity provision, and farming (depositing virtual assets and receiving new virtual assets as rewards).

A domestic user posts on Telegram a proof message claiming they use the Dragonswap service to exchange dollar stablecoin "USDT" for yen stablecoin "JPYC," then use a half-price discounted Olive Young gift card in Korea./Courtesy of Telegram

In the previous month, there was a promotion offering Daiso fixed-price household goods store and Olive Young cosmetics specialty store gift cards at half price when purchased with JPYC. One user posted on social media (SNS) that after using the DragonSwap service to exchange USDT for JPYC, the user obtained Daiso and Olive Young gift cards.

To operate a business in Korea that exchanges (including brokerage or intermediation) virtual assets, one must file a report with the Financial Intelligence Unit (FIU). A virtual asset handler that does business targeting Koreans without filing a report is an unreported virtual asset business and falls under an illegal virtual asset handler. Violations are punishable under the Act on Reporting and Using Specified Financial Transaction Information by up to five years in prison or a fine of up to 50 million won.

Attorney Ye Ja-seon of Economic Democracy 21 said, "If a virtual asset exchange platform continuously provides benefits for an unspecified number of people and takes fees or other revenue, it falls under intermediation or brokerage under the Act on Reporting and Using Specified Financial Transaction Information, as confirmed by a 2024 Supreme Court precedent," adding, "DragonSwap continues brokerage domestically while remaining an unreported virtual asset business."

On the Kaia homepage, the Dragonswap service is introduced in Korean, and Dragonswap provides customer support in its official Telegram community along with Korean-language event announcements./Courtesy of Kaia homepage and Telegram

Conducting promotional activities targeting Koreans through Korean-language websites or SNS such as Telegram also constitutes illegal virtual asset handling business activity. DragonSwap has operated an official community on Telegram, providing event notices in Korean and offering customer support. The Kaia website introduces DragonSwap in Korean and provides a direct link to the DragonSwap service.

An official at the Financial Services Commission said, "Acts of brokering, intermediating, or acting on behalf of virtual asset exchanges in Korea must be reported to the FIU," adding, "Except for the 28 virtual asset businesses reported to the FIU under the Act on Reporting and Using Specified Financial Transaction Information, any virtual asset handler doing business targeting nationals is illegal."

The official added, "Even if it is a foreign business operator, if it conducts domestic business activities through a Korean-language website or SNS such as Telegram, the Act on Reporting and Using Specified Financial Transaction Information applies in the same way."

The Kaia Foundation said that DragonSwap merely used Kaia in the process of exchanging stablecoins and has no direct connection with the foundation. It said DragonSwap is a separate corporation and that it does not know the personal identities of the team operating the project. Under DragonSwap, the more users utilize the service, the more Kaia supply is burned, and the Kaia price rises.

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