South Korea’s New Crypto Law: A Regulatory Revolution!

South Korea has officially introduced the Virtual Asset User Protection Act, marking a significant advancement in the nation’s crypto regulatory framework. This inaugural law, which took effect on Thursday, is a response to past financial upheavals in the crypto space, such as the Terra-Luna crash and the collapse of FTX, and aims to fortify investor protections against unfair trading practices.

The law’s enforcement follows concerted efforts by South Korean crypto exchanges to preempt mass delistings in anticipation of these stricter regulatory requirements. “The FSC expects that the implementation of the Virtual Asset User Protection Act will establish a foundation to provide safe protection for users,” stated the Financial Services Commission (FSC) in a press release. The legislation is also designed to foster a healthier trading environment by imposing severe penalties for unfair trading practices.

Key Provisions of the Act

The Virtual Asset User Protection Act defines digital assets as electronic tokens with economic value, capable of being traded or transferred electronically. It encompasses cryptocurrencies broadly but explicitly excludes non-fungible tokens (NFTs) and central bank digital currencies (CBDCs). Under the new law:

• Crypto exchanges are mandated to deposit user funds in secured financial institutions to safeguard against bankruptcy.
• Exchanges are required to pay interest on these deposits, with rates stipulated between 1% and 1.5%.
• A portion of users’ virtual assets must be stored in cold wallets to enhance security against hacking and system failures.
• Exchanges must carry insurance or maintain reserves sufficient to cover potential losses.

Enhanced Surveillance and Compliance

To curb unfair trading practices, the legislation requires crypto exchanges to actively monitor and report any abnormal transactions, such as unusual price movements or trading volumes, to financial authorities. This measure aims to boost market integrity and protect investors.

Guidelines and Previous Regulations

Earlier in the month, the Digital Asset Exchange Alliance (DAXA) of South Korea set guidelines to prevent widespread crypto delistings, introducing standardized criteria for supporting and discontinuing digital asset trading. DAXA’s recent review of 1,333 digital assets underscores a commitment to transparency and the mitigation of removal risks.

South Korea has previously endeavored to regulate the crypto industry more tightly. Regulations enacted in March 2021 compelled over 60 marketplaces to register with the Financial Intelligence Unit (FIU), necessitating partnerships with banks for real-name accounts and implementing stringent Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures.

Broader Regulatory Efforts and Market Reactions

The Act on the Reporting and Use of Specific Financial Transaction Information was amended on March 5, 2020, targeting virtual asset service providers (VASPs). These providers must now register an authorized bank account, obtain an Information Security Management System certificate, and adhere to enhanced AML and KYC standards.

Despite these efforts, some entities like OKX (formerly OKEx) have exited the South Korean market, citing difficulties adapting their business models to the stringent regulatory landscape.

This legislative move reflects South Korea’s ongoing commitment to integrating cryptocurrency into its financial system responsibly, aiming to protect investors while promoting technological innovation and market stability.