On December 11, the Korean Financial Services Commission (FSC) unveiled a comprehensive set of regulations under the Virtual Asset User Protection Act, which will come into effect on July 19, 2024.
The new rules aim to protect virtual asset investors and improve regulation of the booming local crypto industry, which has suffered devastating scandals in recent years such as the collapse of Terra LUNA.
The law carefully outlines the types of virtual assets that are subject to regulation. It places an obligation on Virtual Asset Service Providers (VASPs) to securely manage and store customer deposits and virtual assets. A key feature of this legislation is the introduction of legal sanctions, which may include criminal sanctions or fines, aimed at discouraging unfair trading practices within the virtual assets sector.
NFTs excluded
The proposal presents a nuanced approach to the tokens excluded from the law. It expands the list to exclude several types of digital tokens, including electronic bonds and non-fungible tokens (NFTs).
Furthermore, it outlines the role of financial institutions, especially banks, as custodians of VASP customers’ funds. These institutions are tasked with investing these funds in safe assets such as government bonds, with VASPs required to compensate customers for the use of their deposits.
To improve the security of virtual asset storage, the FSC has raised the bar for VASPs, requiring them to store at least 80% of customer assets in cold wallets. This marks an increase from the previous requirement of 70%, indicating an increased focus on security.
The proposal also addresses financial guarantees against incidents such as hacking or computer failures. VASPs are now required to carry 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, varying for different types of VASPs.
Abnormal transaction monitoring
To align virtual asset trading with conventional financial practices, the proposal introduces specific criteria to determine when material non-public information becomes public in the virtual asset markets. The rule will improve the detection of insider trading in digital markets.
The FSC’s proposal also takes a strong stance against arbitrary blocking of customer transactions by VASPs, and only allows such actions under necessary protective circumstances.
In addition, VASPs will be required to monitor abnormal transactions, with defined procedures for reporting suspicious activity and imposing fines for unfair trading practices.
This comprehensive regulatory framework from the FSC marks a crucial step in establishing a safe and orderly virtual assets market. The rules are now open for public consultation until January 22, 2024.