South Korea’s first cryptocurrency law goes into full effect.
South Korea’s first cryptocurrency regulatory framework is now fully in effect. The new set of rules, which has been rapidly implemented following the catastrophic collapse of Terra-Luna and FTX in 2022, is focused on ensuring a safety net for cryptocurrency investors.
The new law, the Virtual Asset User Protection Act, was officially approved on July 18, 2024, with a one-year grace period to refine the regulatory details.
The law imposes stricter requirements on digital asset exchanges. Korean service providers are now legally required to keep at least 80% of users’ cryptocurrency deposits in cold storage, separate from their own funds.
Exchanges are also required to entrust users’ cash deposits to a licensed domestic bank and maintain cryptocurrency reserves of the same amount and type as customer deposits. Furthermore, Korean cryptocurrency services are now required to purchase appropriate insurance or establish reserves in case of hacking or liquidity crises.
In addition to measures to protect user funds, the bill mandates exchanges to set up real-time monitoring systems to report irregular trading activity that may be illegal. Companies that fail to comply with the new requirements could face fines or service interruptions. Financial Services Commission (FSC), the country’s top financial regulator.
The FSC also said it has set up a 24-hour surveillance network with local exchanges to monitor suspicious activity in the cryptocurrency market, which came into effect with the new laws.
Kim Hyung-joong, president of the Korea Fintech Association, a domestic think tank, told The Block that the new bill establishes a regulatory system that can open the gateway for domestic blockchain solutions to expand globally. But he pointed out that the law should be expanded beyond its current framework.
Kim said, “Korea has a policy of strictly separating the issuance of virtual assets and their distribution,” and “The Virtual Asset User Protection Act regulates distribution, but there is no law regulating the issuance of virtual assets yet.”
The think tank director added that regulators are also overlooking ways to foster the growth of the domestic cryptocurrency industry, which should be accompanied by strong regulation.
Meanwhile, South Korea’s Virtual Assets Act was originally planned as a two-part law, and lawmakers are currently discussing what should be included in the follow-up regulations. Some of the topics being evaluated include regulating token issuers, reviewing institutional investment bans on cryptocurrencies, and regulating stablecoins.
The country has one of the largest cryptocurrency markets in the world. According to Kaiko data, the South Korean won was the most used fiat currency for cryptocurrency trading in Q1 2024, compared to the US dollar.
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