South Korea's first cryptocurrency regulatory framework is now fully in effect. Following the disastrous collapses of Terra-Luna and FTX in 2022, the new rules were swiftly introduced to ensure the safety of cryptocurrency investors.
Virtual Asset User Protection Act
The new law, the Virtual Asset User Protection Act, was officially approved on July 18, 2024, with a one-year grace period to fine-tune regulatory details. The legislation imposes stricter requirements on digital asset exchanges, including:
1. Fund Storage Requirements:
- Service providers must store at least 80% of user cryptocurrency deposits in cold wallets separate from their own funds.
- Exchanges are required to entrust users' cash deposits to local licensed banks and maintain cryptocurrency reserves equivalent to the number and type of customer deposits.
2. Insurance and Reserve Funds:
- Crypto services must have adequate insurance or establish reserve funds to address hacking incidents or liquidity crises.
3. Real-time Monitoring and Reporting:
- Exchanges need to implement real-time monitoring systems to report irregular trading activities that may be illegal. Companies failing to comply with the new requirements may face penalties or service suspensions from the Financial Services Commission (FSC), South Korea's top financial regulator.
24/7 Monitoring Network
The Financial Services Commission (FSC) recently partnered with local exchanges to establish a 24/7 monitoring network to screen for any suspicious activities in the cryptocurrency market following the new law’s implementation.
Market Insights
Kim Hyoung-joong, President of the Korea Fintech Association, told The Block that the new law establishes a regulatory framework that could open doors for the global expansion of blockchain solutions in the region. However, he pointed out that the law needs to go beyond the existing framework.
Kim Hyoung-joong said, "South Korea's policy strictly differentiates between the issuance and distribution of virtual assets, with the Virtual Asset User Protection Act regulating distribution. However, there is still no law to regulate the issuance of virtual assets." He added that regulators have also overlooked measures to foster the development of the local crypto industry, which must be combined with robust regulation.
Future Legislative Directions
Meanwhile, South Korea's virtual asset law was initially planned as a two-part legislation, with lawmakers currently discussing the contents of subsequent regulations. Regulating token issuers, reviewing the institutional investment ban on cryptocurrencies, and stablecoin regulation are some of the topics under evaluation.
South Korea's new cryptocurrency law marks a significant step forward in digital asset regulation, potentially setting new standards for the global crypto market.
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