In a move to protect virtual asset investors and regulate the rapidly-growing crypto industry, the Korean Financial Services Commission (FSC) has introduced a comprehensive set of regulations. These regulations, outlined in the Act on the Protection of Virtual Asset Users, are scheduled to take effect on July 19, 2024. With the aim of preventing scandals and ensuring the security of virtual assets, the FSC has taken a proactive approach to enhance the regulation of the industry.
One of the key features of the new regulations is the establishment of clear guidelines regarding the types of virtual assets that fall under their purview. The Act places a significant responsibility on Virtual Asset Service Providers (VASPs) to manage and securely store customer deposits and virtual assets. To deter unfair trading practices within the industry, the legislation introduces statutory sanctions, including criminal penalties and fines.
The Act takes a nuanced approach to the tokens excluded from its scope. It expands the list to include digital tokens such as electronic bonds and non-fungible tokens (NFTs). Additionally, the regulation outlines the role of financial institutions, particularly banks, as custodians for VASP customers’ funds. These institutions are required to invest these funds in secure assets like government bonds, while VASPs must compensate customers for utilizing their deposits.
Recognizing the importance of securing virtual asset storage, the FSC has increased the minimum requirement for VASPs to store customer assets in cold wallets to 80%. This represents an increase from the previous 70% requirement and underscores the regulatory focus on bolstering security measures. The proposal also addresses financial safeguards against potential incidents such as hacking or computer failures. VASPs must now have liability insurance or reserves in place to cover a substantial portion of customer assets stored in hot wallets, with minimum criteria specified for different types of VASPs.
To align virtual asset trading with established financial practices, the proposal introduces specific criteria for determining when material nonpublic information becomes public in virtual asset markets. This rule aims to enhance the detection of insider trading and promote fair and transparent trading practices within the digital markets.
The FSC’s proposal firmly addresses the arbitrary blocking of customer transactions by VASPs, permitting such actions only under necessary protective circumstances. VASPs will also be required to monitor abnormal transactions and follow defined procedures for reporting suspicious activities. The regulations further empower the FSC to impose fines on VASPs found engaging in unfair trading practices.
The introduction of this comprehensive regulatory framework by the FSC represents a significant milestone in the establishment of a secure and orderly virtual asset market in South Korea. By setting clear guidelines and implementing stricter security measures, the FSC aims for greater investor protection and market integrity. The regulations are currently open for public consultation until January 22, 2024, illustrating the FSC’s commitment to gathering feedback from stakeholders and refining the framework to best serve the interests of all parties involved.
The Korean Financial Services Commission’s implementation of new regulations for the protection of virtual asset users marks a positive step towards creating a safer and more regulated virtual asset market in South Korea. These regulations address various aspects, including the exclusion of certain tokens, the role of financial institutions, heightened security measures, alignment with conventional financial practices, and the protection of customer transactions. With public consultation open, the FSC is actively seeking input to ensure the effectiveness and fairness of the regulations. As the industry continues to evolve, these regulations will play a crucial role in building trust and confidence among virtual asset investors and promoting the long-term growth and sustainability of the market.