New Regulations for Crypto User Protection in South Korea

The much-talked-about new regulations from South Korea’s financial security regulator, designed to protect users buying and storing crypto assets with virtual asset service providers (VASPs), came into force on July 19, 2024. These measures, known as the "Virtual Asset User Protection Act," are intended to create a safer and more secure environment for cryptocurrency transactions in the country. This article will explore the various aspects of the new regulations, their potential impacts, and the opinions surrounding their implementation.

Overview of the Virtual Asset User Protection Act

The Virtual Asset User Protection Act mandates several protective measures that VASPs must adopt to safeguard users’ crypto assets. Here’s a closer look at what these regulations entail.

Measures for User Protection

South Korea’s Financial Services Commission (FSC) laid out specific requirements that VASPs must fulfill to enhance user protection. These steps include:

• Insurance Against Hacking and Malicious Attacks: VASPs must take out insurance policies to guard against the potential loss of user assets due to hacking attempts and other malicious activities.
• Segregation of Assets: The law requires VASPs to keep customers’ crypto assets separate from their operational assets. This measure aims to ensure that user funds are not used for the company’s business expenses or risked through company bankruptcies.
• Secure Deposits: Customer deposits must be kept securely in banks, reducing the risk of asset loss due to the VASP’s operational failures.

Anti-Money Laundering Efforts

To combat money laundering, the law mandates VASPs to:

• Exercise due diligence in monitoring and screening transactions on their platforms.
• Report any suspicious transactions immediately to the Financial Supervisory Service (FSS).

Regulatory Reporting Requirements

The FSC emphasized that VASPs should maintain robust surveillance systems for tracking suspicious activities and are obliged to report any questionable trading activities promptly. Non-compliance or involvement in unfair trading can lead to criminal prosecution or financial penalties.

Concerns Among South Korean Crypto Exchanges

Despite the protective intentions behind these new regulations, several concerns have emerged from the crypto exchanges operating in South Korea.

Potential for Mass Token Delistings

Crypto exchanges in South Korea have expressed worries that the new rules could lead to the simultaneous delisting of a large number of tokens. On July 3, Cointelegraph reported that a group of 20 South Korean crypto exchanges would collectively review 1,333 cryptocurrencies over the next six months to comply with the new user protection laws.

• Digital Asset Exchange Alliance (DAXA): According to DAXA, the likelihood of mass delisting happening all at once is minimal, providing some reassurance to investors concerned about losing access to their assets.

Political Developments

The regulatory changes come at a time of significant political debate surrounding the taxation of crypto assets in South Korea.

• Proposed Tax Delay: South Korea’s ruling party, the People’s Power Party, officially proposed delaying the implementation of taxes on crypto trading profits. On July 12, the party submitted a proposal to delay the tax imposition, arguing that sudden taxation measures could harm the current sentiment toward virtual assets.

Conclusion

The Virtual Asset User Protection Act marks a significant step towards regulating and securing the crypto market in South Korea. While these measures aim to protect users and bring stability to the market, they also introduce challenges and concerns for VASPs and other stakeholders. The next six months will be crucial in observing how these regulations are implemented and their impact on the broader crypto ecosystem in South Korea.

For those interested in regulatory details and updates on crypto regulations in South Korea, you can refer to the official FSC website.

FAQs

What is the purpose of the Virtual Asset User Protection Act?

The Act seeks to safeguard users’ crypto assets by ensuring that VASPs adopt measures like insurance against hacking, separating user assets from company assets, and maintaining secure user deposits in banks.

What are the anti-money laundering requirements for VASPs under the new law?

VASPs must conduct due diligence to prevent money laundering, including monitoring for suspicious transactions and reporting such activities to the Financial Supervisory Service (FSS).

How might these new regulations affect crypto exchanges in South Korea?

The regulations could lead to the review and potential delisting of numerous tokens on South Korean exchanges over the next six months. However, industry groups like DAXA assert that mass delisting will likely not occur all at once.

Are there any pending political actions related to crypto taxes in South Korea?

Yes, the ruling party, People’s Power Party, has proposed delaying the tax on crypto trading profits, arguing that sudden tax implementation could negatively impact the market.

Where can I find reliable information on South Korea’s financial regulations?

You can visit the Financial Services Commission’s official website for detailed and updated information on financial regulations in South Korea.