South Korea ramps up crypto security with new investor protection laws

On Dec. 11, the Korean Financial Services Commission (FSC) unveiled a comprehensive set of regulations under the Act on the Protection of Virtual Asset Users, which is set to come into effect on July 19, 2024.

The new rules aim to safeguard virtual asset investors and enhance regulation of the booming local crypto industry, which suffered devastating scandals like the Terra LUNA collapse in recent years.

The Act precisely outlines the types of virtual assets that fall under its regulation. It places an obligation on Virtual Asset Service Providers (VASPs) to manage and store customer deposits and virtual assets securely. A key feature of this legislation is the introduction of statutory sanctions, which could come as criminal penalties or fines aimed at deterring unfair trading practices within the virtual asset sector.

NFTs excluded

The proposal presents a nuanced approach to the tokens excluded from the Act. It expands the list to exclude several types of digital tokens, including electronic bonds and non-fungible tokens (NFTs).

Furthermore, it delineates the role of financial institutions, specifically banks, 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 using their deposits.

To enhance the security of virtual asset storage, the FSC has raised the bar for VASPs, requiring them to store a minimum of 80% of customer assets in cold wallets. This marks an increase from the previous 70% requirement, signaling a heightened focus on security.

The proposal also addresses the financial safeguards against incidents like hacking or computer failures. VASPs must now have liability insurance or set aside reserves to cover a significant portion of the customer assets stored in hot wallets. The proposal specifies minimum criteria for these financial safety nets, varying for different types of VASPs.

Abnormal 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 rule will improve the detection of insider trading in digital markets.

The FSC’s proposal also takes a firm stance against the arbitrary blocking of customer transactions by VASPs, allowing such actions only under necessary protective circumstances.

Additionally, VASPs will be required to monitor abnormal transactions, with defined procedures for reporting suspicious activities and imposing fines for unfair trading practices.

This comprehensive regulatory framework by the FSC marks a pivotal step in establishing a secure and orderly virtual asset market. The rules are now open for public consultation until Jan. 22, 2024.