South Korea Implements Landmark Crypto Investor Protection Act
On July 19, 2024, South Korea’s pioneering Virtual Asset User Protection Act came into effect, marking a significant milestone in the country’s regulation of the cryptocurrency industry. This comprehensive law, enacted in response to high-profile incidents like the Terra-Luna crash and FTX collapse, aims to establish a robust framework for investor protection and market integrity in the virtual asset space.
The new legislation introduces several key provisions designed to safeguard crypto investors:
- Asset Protection: Crypto exchanges are now required to deposit users’ funds in licensed banks and maintain separate custody of users’ virtual assets. They must also hold cryptocurrency reserves equal to customer deposits.
- Insurance and Reserves: Virtual Asset Service Providers (VASPs) must obtain insurance or establish reserve funds to cover potential losses from hacking or system failures.
- Cold Storage: At least 80% of user crypto deposits must be kept in offline “cold wallets” to enhance security against cyber threats.
- Market Surveillance: Exchanges are mandated to implement real-time monitoring systems to detect and report suspicious trading activities to the Financial Supervisory Service (FSS).
- Unfair Trading Practices: The law prohibits insider trading, market manipulation, and other unfair practices, with severe penalties for violations, including imprisonment and hefty fines.
- Interest on Deposits: Exchanges are required to pay interest on user deposits, with rates between 1% and 1.5% for local exchanges.
The Financial Services Commission (FSC) has been granted authority to supervise, inspect, and sanction VASPs under the new law. Violations can result in corrective orders, business suspensions, or administrative fines.
While the act provides a comprehensive regulatory framework, it excludes non-fungible tokens (NFTs) and central bank digital currencies from its scope. The FSC has issued separate guidelines to clarify the application of the law to certain types of NFTs.
Industry response has been largely positive, with many viewing the new regulations as a step towards legitimizing and stabilizing the crypto market in South Korea. However, some exchanges have expressed concerns about potential mass delistings of tokens to comply with the stricter requirements.
As the crypto industry continues to mature, the effectiveness of this new regulatory framework will be closely watched by both domestic and international observers, potentially influencing future cryptocurrency legislation worldwide.
Photo by Daniel Bernard on Unsplash
