Regulation
South Korea Enacts First Cryptocurrency Investor Protection Law, Strengthening Existing Rules
South Korea’s Financial Services Commission’s inaugural law to protect cryptocurrency investors went into effect Thursday, as the country seeks to close regulatory gaps in the sector.
The Virtual Asset User Protection Act aims to address unfair business practices that have followed incidents in recent years, including Earth-Moon Incident AND The collapse of FTX.
The implementation of the law follows recent moves by South Korean cryptocurrency exchanges to prevent mass delistings in the face of new regulatory measures.
“The FSC expects that the implementation of the Virtual Asset User Protection Act will create a foundation for providing robust protection for users,” the regulator wrote in a Press release“As it becomes possible to impose severe penalties on those who engage in unfair business activities, it is also expected that this will help establish a healthy order in the virtual business market.”
Law of South Korea, a copy of which is attached FSC Press Release—defines digital assets as electronic tokens with economic value that can be exchanged or transferred electronically. While it includes cryptocurrencies in general, it excludes non-fungible tokens and central bank digital currencies.
By law, cryptocurrency exchange operators must deposit user funds in financial institutions, such as banks, to protect them in the event of bankruptcy. Exchanges must also pay interest on these deposits, with local exchanges required to offer rates between 1% and 1.5%.
Exchanges are required to store some of their users’ virtual assets cold wallets to protect themselves from hacking and system failures. They are also required to carry insurance or set aside reserves to cover potential losses.
To combat unfair trading practices, the law requires cryptocurrency exchanges to monitor and report anomalous transactions. These include everything from unusual price movements or trading volumes to financial authorities, improving market integrity and investor protection.
Earlier this month, South Korean cryptocurrency exchanges operating under the Digital Asset Exchange Alliance (DAXA) introduced guidelines to avoid large-scale delisting of cryptocurrencies.
These guidelines standardize the criteria for supporting and terminating digital asset trading. DAXA announced a semi-annual review of 1,333 existing digital assets to ensure compliance, with the goal of increasing transparency and reducing the risk of asset delisting.
Over the years, South Korea has made some efforts to regulate the industry, attempting to tighten controls on how cryptocurrencies are traded and processed.
Revised regulations for cryptocurrency exchanges that came into effect in March 2021 have prompted more than 60 exchanges to comply with the requirement to register with the country’s Financial Intelligence Unit (FIU), the country’s anti-money laundering and counter-terrorism financial regulatory agency.
The requirement also included creating partnerships with banks to ensure that bank accounts were held in real names.
On March 5, 2020, South Korea amended the Law on Reporting and Use of Specific Financial Transaction Information, targeting virtual asset service providers (VASPs).
Under the new regulations, VASPs are required to register an authorized bank account, obtain an information security management system certificate, and submit business and bank account details to the FIU.
Additionally, they now have to implement strict anti-money laundering and know-your-customer procedures.
This isn’t the first time South Korea has tried to enforce laws against cryptocurrency companies, but it is the first time it has been done specifically in the cryptocurrency sector.
In 2020, the FSC launched a Act on the Reporting and Use of Special Information on Financial TransactionsIn response to the new regulations, OKX, a major Asian cryptocurrency exchange formally known as OKEx, has chosen to exit the South Korean market rather than proceed with registration as a VASP, citing difficulties encountered with its business model under the new regulations of the time.
By Stacy Elliott.