This Friday, the first South Korean crypto regulatory framework has gone into effect after the one-year preparation period. The new law requires firms in the country to comply with stricter requirements to protect investors and their assets.
South Korea’s New Crypto Regulatory Framework
On July 18, 2023, South Korea’s Financial Services Commission (FSC) passed the Virtual Asset User Protection Act to reflect “key provisions” proposed under 19 pre-existing legislative crypto bills pending at the National Assembly.
The new Crypto Act was enacted in response to the growing industry and the need to set a clear and comprehensive regulatory framework. Previously, the industry was regulated through the existing Act on Reporting and Using Specified Financial Transaction Information.
This law was modified in 2021 to incorporate some requirements for Virtual Asset Service Providers (VASPs), including registration with the financial authority as a requisite for crypto firms. Nonetheless, this act was considered unfit to properly regulate the sector and protect investors, as seen with the Terra-LUNA and FTX collapse in 2022.
It was continuously pointed out that the regulatory framework centered on anti-money laundering was not adequate for authorities to actively respond to various types of unfair trading activities, such as price manipulation, and for guaranteeing safe protection of users’ assets.
Following the approval of the new regulatory framework, crypto firms in South Korea had one year to prepare for the Act’s implementation while the financial authorities refined details. The regulator stated to have worked towards a seamless law implementation.
According to the press release, The FSC prepared subordinate regulations “specifying detailed provisions delegated by the law.” South Korea’s Financial Supervisory Service (FSS) also provided a roadmap for crypto firms and implemented a pilot test to “check the readiness of both the regulators and VASPs.”
Virtual Asset User Protection Act Goes Into Effect
On July 19, the Virtual Asset User Protection Act was implemented in South Korea. The act aims to protect investors from various offenses and safeguard their assets.
The new crypto regulatory framework includes provisions to protect users’ deposits, regulate unfair trading practices, and authorize financial regulators to supervise the industry.
Crypto firms are now required to keep customer deposits at banks and pay fees to their customers as interest payments on their deposits. The companies must also separate their assets from clients’ and “have in their custody the types and volume of virtual assets their customers have.”
Since this Friday, VASPs must be insured “against liabilities resulting from hacking or other network malfunctioning accidents” or have a reserve fund to cover these incidents.
Moreover, crypto companies should have a surveillance system for suspicious transactions and report any irregular trading activity to the FSS. Financial regulators, including the FSS and the FSC, now have the authority to supervise and inspect VASPs.
South Korea’s financial authorities can also impose sanctions on those guilty of engaging in unfair trading activities, which could result in criminal punishments or penalty surcharges.
Ultimately, the FSC expects the new crypto regulatory framework will “establish a foundation to provide safe protection for users” and “a sound order in the virtual asset market” in the country.
