South Korea ramps up crypto security with new investor protection laws

Dec. 11, 2023

By Assad Jafri

On Dec. 11, the Korean Financial Services Commission (FSC) unveiled a comprehensive set of regulations under the Act on the Protection of Virtual Asset Users, which is set to come into effect on July 19, 2024.

The new rules aim to safeguard virtual asset investors and enhance regulation of the booming local crypto industry, which suffered devastating scandals like the Terra LUNA collapse in recent years.

The Act precisely outlines the types of virtual assets that fall under its regulation. It places an obligation on Virtual Asset Service Providers (VASPs) to manage and store customer deposits and virtual assets securely. A key feature of this legislation is the introduction of statutory sanctions, which could come as criminal penalties or fines aimed at deterring unfair trading practices within the virtual asset sector.

NFTs excluded

The proposal presents a nuanced approach to the tokens excluded from the Act. It expands the list to exclude several types of digital tokens, including electronic bonds and non-fungible tokens (NFTs).

Furthermore, it delineates the role of financial institutions, specifically banks, as custodians for VASP customers’ funds. These institutions are tasked with investing these funds in secure assets like government bonds, with VASPs required to compensate customers for using their deposits.

To enhance the security of virtual asset storage, the FSC has raised the bar for VASPs, requiring them to store a minimum of 80% of customer assets in cold wallets. This marks an increase from the previous 70% requirement, signaling a heightened focus on security.

The proposal also addresses the financial safeguards against incidents like hacking or computer failures. VASPs must now have liability insurance or set aside reserves to cover a significant portion of the customer assets stored in hot wallets. The proposal specifies minimum criteria for these financial safety nets, varying for different types of VASPs.

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