A New Era of Regulation: Korean Financial Services Commission Introduces Comprehensive Rules for Virtual Assets

A New Era of Regulation: Korean Financial Services Commission Introduces Comprehensive Rules for Virtual Assets

Cryptocurrencies have experienced exponential growth in recent years, with the local crypto industry in Korea being no exception. However, this surge in popularity has also led to devastating scandals and fraudulent activities, leaving investors vulnerable. Recognizing the need for enhanced protection and regulation, the Korean Financial Services Commission (FSC) has unveiled a comprehensive set of regulations. The Act on the Protection of Virtual Asset Users, set to come into effect on July 19, 2024, aims to safeguard virtual asset investors and establish a more secure and orderly market.

One of the key aspects of the new regulations is the precise definition of virtual assets falling under its purview. The Act places an obligation on Virtual Asset Service Providers (VASPs) to securely manage and store customer deposits and virtual assets. It introduces statutory sanctions to deter unfair trading practices within the virtual asset sector, imposing criminal penalties or fines. However, the Act also recognizes the need for flexibility by excluding certain types of digital tokens, such as electronic bonds and non-fungible tokens (NFTs), from regulation.

Enhancing Custodial Practices

To further enhance the security of virtual asset storage, the FSC has raised the bar for VASPs. The new regulations require VASPs to store a minimum of 80% of customer assets in cold wallets, a significant increase from the previous requirement of 70%. This heightened focus on security aims to mitigate the risk of theft and unauthorized access to customer funds. Additionally, financial institutions, particularly banks, are designated as custodians for VASP customers’ funds. These institutions are responsible for investing the funds in secure assets such as government bonds, while VASPs are required to compensate customers for utilizing their deposits.

Addressing incidents like hacking and computer failures, the proposal mandates that VASPs have liability insurance or set aside reserves to cover a substantial portion of customer assets stored in hot wallets. The establishment of these financial safety nets strengthens customer protection and creates a more resilient market. The specific criteria for these safeguards vary depending on the type of VASP, aligning virtual asset trading with conventional financial practices.

In a bid to enhance market integrity, the FSC’s proposal introduces specific criteria for determining when material nonpublic information becomes public in virtual asset markets. This rule aims to improve the detection of insider trading, promoting transparency and fairness in the industry. By aligning virtual asset trading with established financial practices, the regulations create a level playing field for all market participants.

The new regulations take a firm stance against the arbitrary blocking of customer transactions by VASPs, allowing such actions only under necessary protective circumstances. VASPs will be required to monitor abnormal transactions and have defined procedures for reporting suspicious activities. The proposal also establishes fines for unfair trading practices, further protecting investors and creating a more ethical market.

With the unveiling of these comprehensive regulations, the FSC marks a pivotal step towards establishing a secure and orderly virtual asset market in Korea. The Act on the Protection of Virtual Asset Users aims to safeguard investors, enhance regulation, and mitigate the risks associated with the rapidly growing crypto industry. As the rules are now open for public consultation until Jan. 22, 2024, stakeholders and the public have an opportunity to provide input and shape the future of virtual asset regulation. By fostering transparency, accountability, and investor protection, Korea is at the forefront of creating a robust framework for the digital economy.

Regulation

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