South Korea Strengthens Crypto Security with New Investor Protection Laws
On December 11, the Korean Financial Services Commission (FSC) revealed an extensive set of regulations outlined in the Act on the Protection of Virtual Asset Users, slated to take effect on July 19, 2024.
These new regulations are designed to protect investors in virtual assets and bolster oversight of the rapidly growing local cryptocurrency industry, which has faced severe challenges such as the Terra LUNA collapse in recent years.
The Act precisely defines the virtual assets subject to its regulation, imposing a responsibility on Virtual Asset Service Providers (VASPs) to securely manage and store customer deposits and virtual assets. A notable aspect of this legislation is the introduction of statutory sanctions, which may manifest as criminal penalties or fines aimed at discouraging unfair trading practices within the virtual asset sector.
NFTs excluded
The proposal introduces a nuanced strategy for tokens that are exempted from the Act, broadening the list to encompass various digital tokens. This extension involves the exclusion of certain types of tokens, such as electronic bonds and non-fungible tokens (NFTs).
Moreover, it outlines the responsibility of financial institutions, particularly banks, to serve as custodians for the funds of Virtual Asset Service Providers (VASPs) customers. These institutions are mandated to prudently invest these funds in secure assets, such as government bonds, and VASPs are obligated to reimburse customers for utilizing their deposits.
In a bid to fortify the security of virtual asset storage, the FSC has elevated the standards for Virtual Asset Service Providers (VASPs), compelling them to store a minimum of 80% of customer assets in cold wallets. This represents an escalation from the previous 70% requirement, underscoring an intensified emphasis on security measures.
The proposal additionally tackles financial safeguards in response to incidents such as hacking or computer failures. Virtual Asset Service Providers (VASPs) are now mandated to have liability insurance or allocate reserves to safeguard a substantial portion of customer assets stored in hot wallets. The proposal outlines minimum criteria for these financial safety measures, with specifications tailored to the distinct types of VASPs.
Abnormal transaction monitoring
In an effort to synchronize virtual asset trading with traditional financial norms, the proposal introduces specific criteria for determining the moment when material nonpublic information transitions into the public domain within virtual asset markets. This rule aims to enhance the identification of insider trading activities in digital markets.
The FSC’s proposal adopts a strong position against the arbitrary blocking of customer transactions by Virtual Asset Service Providers (VASPs), permitting such actions only under circumstances deemed necessary for protective measures.
Moreover, Virtual Asset Service Providers (VASPs) will be obligated to monitor abnormal transactions, incorporating specified procedures for reporting suspicious activities and implementing fines for unfair trading practices.
The FSC’s comprehensive regulatory framework represents a crucial milestone in establishing a secure and well-organized virtual asset market. The rules are currently open for public consultation, and stakeholders can provide input until January 22, 2024.
