Key Points:
- South Korea enacts a comprehensive cryptocurrency investor protection law on July 19, 2024.
- The law mandates insurance for virtual asset service providers (VASPs) to protect users against hacking and system failures.
- VASPs must store at least 80% of user deposits in cold storage and cash deposits in approved banks.
- Regular monitoring for suspicious transactions and mandatory reporting of market misconduct to financial authorities.
- Severe penalties for non-compliance, including fines and imprisonment for market misconduct.
Article:
On July 19, 2024, South Korea took a significant step in regulating its rapidly growing cryptocurrency industry by implementing a comprehensive investor protection law. This new legislation addresses various risks associated with cryptocurrency activities, particularly those highlighted by the high-profile collapses of Terra-Luna and FTX in recent years.
Key Features of the New Law
The law, officially known as the Virtual Asset User Protection Act, was designed to fill the regulatory gaps left by the earlier “Act on Reporting and Use of Specific Financial Transaction Information,” which was amended in 2021. While the previous law primarily focused on anti-money laundering (AML) measures, it proved insufficient in protecting investors from the broader risks inherent in the cryptocurrency market.
Protection Against Hacking and System Failures
Under the new law, Virtual Asset Service Providers (VASPs) are required to obtain insurance coverage to safeguard users against losses caused by hacking incidents or system failures. This measure ensures that users’ digital assets are better protected in the event of security breaches.
VASPs must also segregate at least 80% of user deposits, keeping them in cold storage, and entrust cash deposits to approved Korean banks. This provision aims to enhance the security of user funds and prevent misappropriation by service providers.
Monitoring and Reporting of Suspicious Activities
To combat market misconduct, the law mandates VASPs to maintain a system for continuous monitoring of suspicious transactions. Any detected irregularities must be promptly reported to the Financial Supervisory Service (FSS). This requirement is intended to deter fraudulent activities and enhance market transparency.
The Financial Services Commission (FSC) and FSS have the authority to inspect VASPs to ensure compliance with the user protection regulations. Non-compliant service providers may face penalties, including suspension of operations and substantial fines.
Severe Penalties for Market Misconduct
The law introduces stringent penalties for those found guilty of engaging in unfair trading practices. Offenders could face imprisonment for over a year or fines ranging from three to five times the illicit gains. In cases where the unlawful profits exceed 5 billion won (approximately $4.4 million), the penalty could be as severe as life imprisonment.
Ongoing Improvements and Regulatory Collaboration
South Korean financial authorities have committed to continuous improvement of the law in collaboration with investigative agencies. This cooperative approach aims to ensure that the regulatory framework remains effective and adaptable to the evolving cryptocurrency landscape.
The enactment of South Korea’s Virtual Asset User Protection Act marks a significant milestone in the country’s regulatory efforts to safeguard cryptocurrency investors. By addressing the security, transparency, and integrity of cryptocurrency activities, the law is expected to foster a safer environment for both investors and service providers. As the industry evolves, ongoing regulatory enhancements will be crucial in maintaining investor confidence and market stability.
