South Korea’s first crypto regulatory framework is now fully operational. This law was expedited after the collapses of Terra-Luna and FTX in 2022, aiming to provide safety for cryptocurrency investors.
The Virtual Asset User Protection Act
The Virtual Asset User Protection Act, officially approved on July 18, 2023, had a one-year grace period to finalize regulation details. Under this act, digital asset exchanges must now store at least 80% of user deposits in cold storage, separate from their own funds. Exchanges are also required to entrust users’ cash deposits to a licensed local bank and maintain cryptocurrency reserves matching customer deposits. Additionally, crypto services must have insurance or a reserve fund for hacks or liquidity issues.
Monitoring and Compliance Requirements
The law mandates exchanges to implement real-time monitoring systems to report irregular trading activities. Non-compliant companies may face penalties or service suspension from the Financial Services Commission (FSC), South Korea’s top financial regulator.
4-Hour Surveillance Network
The FSC has introduced a 24-hour surveillance network with local exchanges to detect suspicious activity in the cryptocurrency market. This network was launched alongside the new law.
Future Regulatory Considerations
Kim Hyoung-joong, president of the Korea Fintech Society, stated that the new law creates a regulatory system that could allow local blockchain solutions to expand globally. However, he emphasized the need for regulations to cover the issuance of virtual assets, not just their distribution.
Future Regulatory Considerations
Kim noted that while the Virtual Asset User Protection Act regulates distribution, there is no law for the issuance of virtual assets. He added that regulators are overlooking ways to promote the growth of the local crypto industry, which should accompany strong regulation.
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South Korea hosts one of the world’s largest cryptocurrency markets. In the first quarter of 2024, the Korean won was the most-used fiat currency for crypto trading, surpassing the U.S. dollar, according to Kaiko data.
