On Thursday, South Korea's Financial Services Commission (FSC) rolled out its first-ever law aimed at shielding cryptocurrency investors, as the country works to patch the regulatory gaps plaguing the industry.
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The Act on the Protection of Virtual Assets targets shady trading practices following past disasters, like the Terra-Luna collapse and the FTX fiasco.
For now, South Korean law defines digital assets as electronic tokens with economic value that can be sold or transferred electronically. While it broadly covers cryptocurrencies, it leaves out non-fungible tokens (NFTs) and central bank digital currencies (CBDCs).
Under this law, crypto exchange operators must stash user funds in financial institutions like banks to safeguard them in the event of bankruptcy. Exchanges are also required to pay interest on these deposits, with local exchanges offering rates from 1% to 1.5%.
Exchanges must store a portion of their users' virtual assets in cold wallets to fend off hacks and system failures. They are also mandated to get insurance or set aside reserves to cover potential losses.
To crack down on dodgy trading practices, the law requires crypto exchanges to monitor and report abnormal transactions, from unusual price movements to trading volumes, to financial authorities, thus bolstering market integrity and investor protection.
Legislation Background
For years, South Korea has made efforts to regulate the crypto industry, trying to tighten control over how cryptocurrencies are handled and traded.
In March 2021, the Act on Reporting and Using Specified Financial Transaction Information was revised to require virtual asset service providers (VASPs) to register with the financial authority.
Additionally, various regulatory mechanisms were put in place to prevent money laundering. However, it was constantly pointed out that the regulatory framework focused on anti-money laundering was insufficient for authorities to actively respond to various types of unfair trading practices and ensure robust protection of user assets.
The FSC expects that the implementation of the Virtual Asset User Protection Act will establish a foundation to provide safe protection for users. As it becomes possible to bring severe penalties against those engaging in unfair trading activities, it is also expected to help establish a sound order in the virtual asset market. The financial authorities plan to continue to seek stronger cooperation with investigative authorities and actively seek improvements to make sure that the new law is effectively implemented.
Given the urgency and importance of providing reliable protection for users, the Virtual Asset User Protection Act was enacted on July 18, 2023, reflecting key provisions proposed in 19 legislative bills. Since then, regulations have been developed over the course of about a year, and VASPs have been given time to prepare for the implementation of the Virtual Asset User Protection Act starting July 19, 2024.
The FSC expects the implementation of the Virtual Asset User Protection Act to lay the groundwork for ensuring reliable user protection. As stringent penalties can now be applied to those engaged in unfair trading activities, it is also anticipated to help establish a solid order in the virtual asset market. Financial authorities plan to continue striving for closer cooperation with investigative agencies and actively seek improvements to ensure effective enforcement of the new law.
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By addressing past vulnerabilities and implementing stringent measures to protect investors, South Korea is setting a new standard for crypto regulation. As the law takes effect, it is expected to enhance market integrity, foster investor confidence, and establish a more secure and transparent environment for digital asset trading.
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