South Korea Proposes Robust Regulations to Safeguard Crypto Investors

In a strategic move to fortify investor protection, South Korea’s Financial Services Commission (FSC) has unveiled a comprehensive set of regulations under the Act on the Protection of Virtual Asset Users. Slated to take effect on July 19, 2024, these rules aim to bring order to the rapidly evolving crypto landscape. Here’s a breakdown of the key provisions and their potential impact on the crypto industry.

Defining the Landscape

The Act carefully defines the types of virtual assets falling under its jurisdiction, outlining obligations for Virtual Asset Service Providers (VASPs) to securely manage and store customer deposits and virtual assets. A noteworthy addition is the introduction of statutory sanctions, including criminal penalties and fines, signaling a resolute stance against unfair trading practices.

Exclusions and Custodianship

The proposal expands the list of excluded tokens, including electronic bonds and non-fungible tokens (NFTs). Financial institutions, specifically banks, are designated as custodians for VASP customers’ funds. These institutions are tasked with investing these funds in secure assets like government bonds, with VASPs required to compensate customers for the use of their deposits.

Security Measures

The FSC has raised the bar for VASPs, requiring them to store a minimum of 80% of customer assets in cold wallets, marking a significant increase from the previous 70% requirement. This heightened focus on security aims to protect against incidents like hacking or computer failures.

Financial Safeguards

VASPs must now have liability insurance or set aside reserves to cover a significant portion of customer assets stored in hot wallets. The proposal specifies minimum criteria for these financial safety nets, varying for different types of VASPs.

Insider Trading and Transaction Monitoring

To align virtual asset trading with conventional financial practices, the proposal introduces specific criteria for determining when material nonpublic information becomes public in virtual asset markets. The FSC takes a firm stance against the arbitrary blocking of customer transactions by VASPs, allowing such actions only under necessary protective circumstances. VASPs will be required to monitor abnormal transactions, with defined procedures for reporting suspicious activities and imposing fines for unfair trading practices.

Looking Ahead

This comprehensive regulatory framework by the FSC is a pivotal step in establishing a secure and orderly virtual asset market. The rules are currently open for public consultation until January 22, 2024, and are expected to be implemented from July 19, 2024, following legislative proceedings. As South Korea strengthens its regulatory landscape, crypto investors can anticipate a more secure and transparent environment for their virtual asset transactions.