South Korea officially implements the "Virtual Asset User Protection Law", with a one-year grace period for VASPs

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The South Korean "Virtual Asset User Protection Act" Approved with Grace Period

The "Virtual Asset User Protection Act" was officially approved on July 18, 2024, providing a one-year grace period to refine and implement regulatory details to ensure thorough preparation for the changes.

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Main Regulations for Exchanges: 80% of Assets Kept in Cold Wallets

The "Virtual Asset User Protection Act" imposes strict requirements on digital asset exchanges to enhance the security and reliability of their operations. One major provision is that service providers must keep at least 80% of user cryptocurrency deposits in cold wallets, separate from their operational funds, aimed at safeguarding user assets from potential exchange failures or mismanagement.

Fiat Held in Local Banks, Crypto Reserves Matching Debts

Exchanges are also required to entrust user cash deposits to licensed local banks to ensure a higher level of trust and security. Additionally, they must maintain crypto reserves equal in amount and type to customer deposits. This requirement aims to ensure that exchanges can meet withdrawal demands even during periods of high volatility.

Mandatory Insurance and Reserve Establishment

To address potential hacker attacks or liquidity crises, cryptocurrency services in South Korea are now required to participate in appropriate insurance plans or establish reserve funds. This additional layer of protection aims to provide financial buffers in case of unforeseen events, further safeguarding user investments.

Exchanges Obligated to Conduct Real-Time Monitoring, Illegal Activities Penalized

Exchanges to Check for Illegal Trading Activities

In addition to financial safeguards, the new law requires exchanges to implement real-time monitoring systems. These systems are responsible for detecting and reporting abnormal trading activities that may indicate illicit behavior. The law aims to curb market manipulation and ensure a fair trading environment.

Non-Compliance Could Lead to Suspension

Exchanges that fail to comply with these new regulations may face severe penalties, including possible suspension of services by the Financial Services Commission (FSC), South Korea's top financial regulatory body.

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24-Hour Monitoring by South Korea Financial Supervisory Service

To enhance the new regulatory framework, the FSC has collaborated with local exchanges to launch a 24-hour monitoring network that continuously screens for suspicious activities in the cryptocurrency market, aiming to promptly detect and prevent fraudulent behavior.

The Future Path of Cryptocurrency Legislation in South Korea

The President of the South Korean Fintech Association is optimistic about the new regulatory system. He points out that this will help expand South Korea's regulatory solutions globally, but the laws need to evolve faster as South Korea still lacks legislation for issuing virtual assets.

The initial virtual asset law is part of a two-stage legislative process. Legislators are currently discussing the components of subsequent regulations. Key topics under discussion include regulating token issuers, potentially lifting the ban on institutional investment in cryptocurrencies, and stablecoin regulations. South Korea is actively creating a comprehensive and flexible regulatory environment.

Strong Cryptocurrency Market in South Korea

South Korea boasts one of the world's largest cryptocurrency markets. According to data from Kaiko, in the first quarter of 2024, the South Korean Won was the most frequently used fiat currency in cryptocurrency transactions, surpassing the US Dollar. This highlights South Korea's significant role in the global cryptocurrency ecosystem and underscores the importance of its regulatory progress.

The Financial Services Commission (FSC) of South Korea's survey results for the domestic cryptocurrency market in the second half of 2023 revealed a large and rapidly growing user base, with an increase of 390,000 users from the first half to the second half of 2023, reaching 6.45 million users. Considering South Korea's population of approximately 50 million, this accounts for 12.9%.

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