I really want to know how San ended up losing his memory and what's his connection to Hwan...

They have been mentioning that reapers have their memories taken(〜￣△￣)〜

He can't be a reaper, though. He doesn't have any yang energy. My current guess is that he was heavily involved with Hwan's previous decapitation and had to be stripped of his "smell" (his power?) to avoid retribution. Not sure how 704 is involved and why he's feeling guilty. Maybe 704 was the one that told San to tag along with Geumsun? Or maybe 704 revealed San's sacred object/name, making him vulnerable to Hwan.