On October 10, 2023, South Korea’s Financial Services Commission (FSC) took a significant step towards enhancing its regulatory framework for cryptocurrencies by forming a Virtual Asset Committee. This initiative aims to evaluate the approval process for spot crypto exchange-traded funds (ETFs), a critical area of focus considering the growing interest in digital assets among investors. The committee will not only serve as an advisory body but also seeks to provide comprehensive guidance for a rapidly evolving crypto sector. Headed by FSC Vice Chairman Soyoung Kim, the committee is bolstered by participation from various government departments and nine representatives from the private sector.
The establishment of the Virtual Asset Committee highlights the challenges faced by South Korea in regulating its digital asset market. Currently, the Capital Markets Act bans Bitcoin (BTC) and other cryptocurrency ETFs, as well as corporate accounts for digital assets, primarily due to concerns regarding anti-money laundering (AML) compliance. These restrictions have impeded the growth of the crypto market in South Korea, limiting both institutional and retail investors’ access to various financial products associated with cryptocurrencies. By tackling these issues, the committee aims to lay the groundwork for more comprehensive regulations that could ultimately facilitate the approval of crypto ETFs and improve access to digital assets for users.
In addition to launching the Virtual Asset Committee, the FSC has initiated the Digital Asset User Protection Foundation. This non-profit organization will focus on helping users recover assets from digital service providers that have halted operations, emphasizing the critical need for user protection in a market often beset by high volatility and regulatory uncertainty. Such institutions reflect the FSC’s commitment to creating a more secure environment for digital asset investors as the new law aimed at protecting users goes into effect. Moreover, the FSC is actively reviewing the renewal applications for digital asset service providers, with some licenses set to expire in October 2024, indicating a proactive approach to ensuring compliance within the industry.
Chairman Kim Byung-hwan’s address to the National Assembly reiterated the agency’s intention to develop a robust monitoring system for virtual assets while addressing vulnerabilities within the current trading oversight. These measures serve the dual purpose of ensuring fair trading practices and enhancing investor confidence in the digital asset market. As the FSC moves towards implementing the second phase of regulations targeting crypto service provider operations, the market could see a shift in how these entities function in South Korea.
One of the anticipated outcomes of approving spot Bitcoin ETFs is the reduction of the “Kimchi premium” — the discrepancy in cryptocurrency prices between South Korea and other global markets. This price difference highlights local demand and sets the stage for arbitrage opportunities. As the market matures with the involvement of institutional investors and improved trading conditions, the Korean crypto economy can expect increased competitiveness and efficiency.
Ultimately, the formation of the Virtual Asset Committee and the initiatives surrounding it mark a critical phase in South Korea’s journey toward a mature and regulated cryptocurrency market. With the FSC taking definitive steps to streamline regulations and protect users, the country may soon witness an influx of investment in digital assets. As the global landscape for cryptocurrencies continues to evolve, South Korea is poised to establish itself as a significant player in the digital economy.
