South Korea Implements Comprehensive Cryptocurrency Regulations

On July 19, 2024, South Korea witnessed the Virtual Asset User Protection Act enactment, a significant milestone aimed at safeguarding cryptocurrency users within the nation. 

The Financial Services Commission (FSC) has rolled out this new law, which incorporates stringent measures to combat unethical trading and enhance the security of user assets.

Regulatory background and development

The Act on Reporting and Using Specified Financial Transaction Information was amended in March 2021. This amendment mandated that all virtual asset service providers (VASPs) register with the financial regulatory authority and introduced critical anti-money laundering protocols, including the travel rule. 

Despite these measures, challenges such as price manipulation and safeguarding user assets persisted, prompting the need for more robust legislation. Subsequently, the Virtual Asset User Protection Act was legislated on July 18, 2023, after synthesizing key elements from 19 pending legislative proposals in the National Assembly. Over the past year, the FSC has developed additional regulations to support the smooth transition and compliance of VASPs with the new law.

Key provisions of the new act

The comprehensive Act covers several crucial aspects to bolster user security and market integrity. First, it mandates that VASPs securely store bank customer deposits, accruing interest on these deposits. Additionally, VASPs must segregate customers’ virtual assets from their own, ensuring they hold the same types and amounts of assets as their customers.

VASPs must either acquire insurance or establish a reserve fund to mitigate risks associated with cyber threats. Moreover, these providers must implement systems to monitor and report any suspicious transactions to the Financial Supervisory Service (FSS) promptly.

Under the new regulations, the FSS has the authority to conduct inspections to verify compliance with user protection laws. If a VASP is found engaging in unfair trading practices, it could face severe penalties, including criminal charges and fines. The FSC can impose sanctions on non-compliant entities, such as operational suspensions and monetary penalties.

The FSC believes these strict regulations will deter unlawful activities and maintain market order, thus fostering a safer user trading environment. However, the Commission advises users that while the regulations provide substantial protections, they do not guarantee total asset safety.

Risks associated with unregulated transactions

The FSC warns that trading through unregistered service providers or engaging in over-the-counter (OTC) and peer-to-peer (P2P) transactions could pose additional risks due to the absence of rigorous market surveillance. Users are encouraged to exercise caution and utilize registered and compliant service platforms to minimize potential risks.

South Korea’s new regulatory framework marks a pivotal step towards creating a more secure and equitable cryptocurrency market. The financial authorities are committed to continuously collaborating with investigative bodies to refine these regulations and ensure they effectively protect users and maintain market integrity.

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