Source: Research firm, Kaiko
- The legislation, ‘the Virtual Asset User Protection Act,’ focuses on protecting cryptocurrency investors and preventing market abuses.
- It requires crypto service providers to ring-fence users’ assets and deposits, have insurance, hold 80% of reserves in offline cold wallets, and maintain records of all transactions for 15 years.
- Service providers must either have insurance or mutual aid coverage, or alternatively, have a reserve fund to compensate users in the event of hacks or other failures.
- Meanwhile, the likelihood of approving a Spot BTC ETF in South Korea has not yet been discussed.
While the crypto industry has been heating up with the great news of the approval of spot BTC ETFs and spot ETH ETFs in a row, South Korea’s cryptocurrency service providers are busy preparing for the upcoming ‘Virtual Asset Protection Act,’ the first legislation for digital assets in South Korea.
This legislation focuses on protecting cryptocurrency investors and preventing market abuses. South Koreans’ passion for cryptocurrencies is surprisingly high, as in Q1 2024, the South Korean Won (KRW) surpassed the US Dollar (USD) in terms of cumulative trade volume. More interestingly, the overwhelming majority of traders were retail investors who piled their digital assets into the local exchanges Upbit and Bithumb.
Therefore, the Financial Services Commission developed this legislation to create a sound cryptocurrency market, protecting these retail investors.
The details:
- Asset Custody and Security
- Ring-fencing User Assets: Crypto service providers must segregate users’ assets and deposits from their business assets.
- Insurance Requirement: Providers are required to have insurance to protect against potential losses due to hacks or system failures.
- Cold Wallet Storage: 80% of reserves must be held in offline cold wallets to mitigate risks of online breaches.
- Transaction Records: Providers must maintain records of all transactions for 15 years to ensure transparency and accountability.
- Penalties for Misconduct
- Price Manipulation and False Promotion: The legislation imposes penalties for manipulating prices or falsely promoting crypto assets.
- Disclosure Failures: Failing to provide required information to investors is penalized.
- Legal Consequences: Convictions can result in a minimum of one year in prison or fines ranging from three to five times the profits gained from violations.
- Definition of Virtual Assets
- Economic Value Representation: Virtual assets are defined as an “electronic representation of an economic value that can be traded or transferred electronically.”
- Exclusion of CBDCs: Central Bank Digital Currency (CBDC) issued by the Bank of Korea is excluded from this definition, ensuring clarity in regulatory scope.
Internally discussing the approval of spot Bitcoin ETFs
Meanwhile, South Korean authorities are currently debating the potential approval of spot Bitcoin exchange-traded funds (ETFs) in the country, according to the financial watchdog chief on Tuesday. Lee Bok-hyun, governor of the Financial Supervisory Service, remarked, “Among the authorities, I am one of those who hold a positive view on virtual assets. However, there are others who remain cautious, and it is important to consider their perspectives as well. We are having internal discussions on this matter.”