South Korea approves Virtual Asset User Protection Law: 70% of exchanges to hold funds in cold wallets, insider trading to be punishable

In order to protect cryptocurrency users, the South Korean Cabinet approved the enforcement decree of the "Virtual Asset User Protection Law" on June 25. The decree will come into effect on July 19, aiming to protect cryptocurrency users and establish a healthy order in the virtual asset market.

The South Korean Financial Services Commission has established a virtual asset division with a total of 12 full-time staff members.

Main Provisions of the "Virtual Asset User Protection Act"

According to Korean media reports, the "Virtual Asset User Protection Act" defines virtual assets and lists what does not fall under virtual assets. The law requires Virtual Asset Service Providers (VASPs) to securely store and manage users' fiat deposits and virtual assets. Additionally, it introduces criminal penalties and fines for unfair trading practices involving virtual assets such as insider trading and price manipulation.

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Definition of Virtual Assets as Valuable Electronic Certificates

The enforcement regulations detail the specific procedures and methods entrusted by law. It draws on the existing "Financial Information Act" to define virtual assets as electronic certificates with economic value that can be electronically traded or transferred. Certain electronic certificates regulated by other laws or posing low risk to users are excluded from the definition of virtual assets.

Exclusions from the Definition of Virtual Assets: Deposit Tokens and NFTs

The regulations exclude electronic bonds and gift cards under the "Electronic Financial Transactions Act," and also include deposit tokens and non-fungible tokens (NFTs) in the exclusion list as they are considered new digital assets with low risk to users. Furthermore, the Financial Services Commission (FSC) will establish a Virtual Assets Committee to provide recommendations for the policies and systems of the virtual asset market and VASPs. The committee will be chaired by the Vice Chairman of the FSC and include relevant government departments and private sector experts.

Protecting User Deposits, and Returns?

VASPs must deposit user funds in reputable institutions, especially banks. These funds must be managed separately from the institution's assets and invested in secure assets such as government and municipal bonds by agreement with the bank, with returns paid to the VASP, and net income used as deposit fees transferred to users.

Protecting User Deposits in the Event of VASP Bankruptcy

In the event of VASP bankruptcy or deregistration, designated banks must announce the details of user deposit payments through newspapers and their websites. The banks must also verify and directly refund the deposits to users to ensure the safety of user funds in adverse circumstances.

Requirements for Storing Virtual Assets: 70% in Cold Wallets

VASPs must store at least 70% of user virtual assets in cold storage to reduce the risk of hacking. The FSC may set different storage ratios in cases of significant threats such as hacking or business closure and notify VASPs accordingly.

Monitoring and Preventing Unfair Trading

The law requires VASPs to continuously monitor abnormal transactions and authorizes the enforcement regulations to define these transactions. Abnormal transactions include abnormal fluctuations in the price or volume of virtual assets, as well as rumors or reports that may affect prices. The Financial Supervisory Service and VASPs will develop self-regulatory guidelines to monitor these transactions, and any suspected unfair trading must be reported promptly to the financial authorities.

Disclosure of Non-Public Material Information

The regulations stipulate when information becomes "public." Information published in two or more comprehensive or professional economic newspapers is deemed public at 6 a.m. the next day; information provided by broadcasting companies or news agencies becomes public information six hours after publication. Similarly, information on VASP websites becomes public information six hours after publication, and information on issuers' websites becomes public information 24 hours after publication, provided that this information is accessible to the public and continuously published for at least six months.

Criminal Penalties and Fines for Unfair Trading

The law imposes criminal penalties and fines for unfair trading activities. The severity of penalties, including imprisonment and fines, will be related to the illicit gains from such activities, with the highest penalty reaching life imprisonment. The regulations categorize these gains into realized, unrealized profits, and avoided losses, detailing the specific calculation methods for different types of unfair trading activities.

Circumstances in Which Exchanges Can Block User Transactions

The regulations allow VASPs to block user deposits and withdrawals in legitimate circumstances such as system malfunctions, maintenance, or hacking incidents. This includes administrative orders from relevant authorities and situations involving funds related to illegal activities under the "Proceeds of Crime Control Act."

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Official Announcement in Early July, Implementation in Late July

The regulations will be officially announced early next month and will be implemented on July 19 along with the "Virtual Asset User Protection Act." The FSC will also formulate new regulatory guidelines expected to be approved on July 10 for supervising the virtual asset industry and market operations.

The FSC emphasizes that the implementation of this law and regulations will create a basic safety net for user protection and promote sound market order. They assure thorough preparations to ensure smooth implementation and strengthen user protection in the virtual asset market.

Korea plans to establish a "Virtual Asset Division" by the end of June to protect user assets, with public officials prohibited from holding virtual assets