In a significant move to protect virtual asset investors and regulate the rapidly growing cryptocurrency industry, the Korean Financial Services Commission (FSC) has unveiled a comprehensive set of regulations. The Act on the Protection of Virtual Asset Users is set to come into effect on July 19, 2024, and aims to tackle the challenges faced by the local crypto industry, including devastating scandals like the Terra LUNA collapse. These new rules bring about a much-needed level of security and transparency to the virtual asset market in Korea.
Enhancing Regulation and Safeguarding Investors
Under the Act, the FSC outlines the types of virtual assets that fall under its regulation. It places an obligation on Virtual Asset Service Providers (VASPs) to manage and store customer deposits and virtual assets securely. A notable aspect of this legislation is the introduction of statutory sanctions, including criminal penalties or fines, to deter unfair trading practices within the virtual asset sector.
Furthermore, the Act expands the list of excluded tokens, such as electronic bonds and non-fungible tokens (NFTs), which are not subject to the Act’s regulations. This distinction ensures that the rules are focused on the necessary areas of the market while still providing flexibility for innovative digital assets.
Role of Financial Institutions
One significant development in the regulations is the delineation of the role of financial institutions, particularly banks, as custodians for VASP customers’ funds. These institutions are now responsible for investing these funds in secure assets like government bonds. VASPs are required to compensate customers for using their deposits, providing an added layer of protection and accountability.
Heightened Focus on Security
To enhance the security of virtual asset storage, the FSC has set a higher bar for VASPs by requiring them to store a minimum of 80% of customer assets in cold wallets. This increase from the previous 70% requirement demonstrates a heightened focus on safeguarding customer assets from potential risks.
Additionally, the proposal addresses the need for financial safeguards against incidents like hacking or computer failures. VASPs are now required to have liability insurance or set aside reserves to cover a significant portion of customer assets stored in hot wallets. The proposal specifies minimum criteria for these financial safety nets, which vary according to the type of VASP.
Recognizing the importance of aligning virtual asset trading with conventional financial practices, the proposal introduces specific criteria for determining when material nonpublic information becomes public in virtual asset markets. This rule aims to improve the detection of insider trading in digital markets, ensuring a fair and transparent trading environment.
The FSC’s proposal takes a firm stance against arbitrary blocking of customer transactions by VASPs, allowing such actions only under necessary protective circumstances. VASPs will also be required to monitor abnormal transactions and have defined procedures for reporting suspicious activities. Imposing fines for unfair trading practices further reinforces the commitment to maintaining integrity and fairness in the virtual asset market.
The comprehensive regulatory framework introduced by the FSC marks a pivotal step in establishing a secure and orderly virtual asset market in Korea. With these regulations, investors can have increased confidence in the industry, knowing that their assets are being protected and that trading practices are being closely monitored.
The FSC has opened the new rules for public consultation until Jan. 22, 2024, allowing stakeholders to provide their input and shape the final regulations. This inclusive approach ensures that the regulations reflect the needs and aspirations of all participants in the virtual asset market.
The Korean Financial Services Commission’s introduction of new regulations demonstrates a commitment to protect virtual asset investors and enhance the regulation of the crypto industry. By establishing clear guidelines for VASPs, outlining the role of financial institutions, and emphasizing security and fairness, these regulations pave the way for a more secure and transparent virtual asset market in Korea.