South Korea is about to implement the "Virtual Asset User Protection Law": encryption exchanges face new challenges, and investors are better protected.

The South Korean Financial Commission has released a draft subsidiary law, which will officially take effect in July, with violators facing a maximum penalty of double fines.

The South Korean government will officially implement the “Virtual Asset User Protection Act” on July 19, 2024, in order to strengthen regulation of the cryptocurrency market and protect investors’ asset safety. To align with the law’s effectiveness, the Financial Services Commission (FSC) has recently released detailed sub-law drafts, providing clear regulatory direction to the market.

This new law marks a significant advancement in South Korea’s regulatory framework for crypto assets. In the future, not only will the operational requirements for exchanges become stricter, but there will also be harsher penalties for illegal activities, sending a clear signal to the crypto industry that “compliance is the only way forward.”

Legislative Background: There are many chaotic phenomena in the cryptocurrency market, and protecting investors is imperative.

In recent years, the cryptocurrency market in South Korea has grown rapidly, but it has also been accompanied by numerous issues, including investor asset theft, insider trading, price manipulation, and other controversies, drawing social attention. To address this, the South Korean government has accelerated the legislative process since 2023 and passed the “Virtual Assets User Protection Act” in July of that year.

The core objective of the law is to establish a comprehensive system that allows investors to trade cryptocurrency assets in a more transparent and secure environment, avoiding losses due to information asymmetry or exchange failures.

Key point one: User asset separation management to avoid “run away” risks.

According to the latest draft regulations published by the Financial Committee, all Virtual Asset Service Providers (VASP), such as cryptocurrency exchanges, must separate users’ crypto assets from the company’s own assets. This regulation aims to prevent companies from misappropriating user funds, similar to the customer asset trust mechanism in traditional finance.

In addition, for users’ fiat funds (such as Korean Won), VASP operators must also collaborate with approved banks for trust management.

Key Point 2: Exchanges need to purchase insurance to strengthen user protection.

Another highlight of the regulation is that operators must purchase insurance for user assets or establish a reserve fund to provide compensation in the event of unexpected situations such as hacking or system failures. The amount of insurance or reserves must cover at least a certain percentage of the user assets managed by the operator, with the specific percentage to be determined by the regulatory authority as needed.

This measure aims to strengthen market confidence, allowing investors to have protection when facing unforeseen risks.

Key Point Three: Prohibition of insider trading and market manipulation, with severe penalties for violators.

To prevent common misconducts in the cryptocurrency space, such as insider trading and price manipulation, the new regulations clearly stipulate several prohibitions, including:

Prohibition of trading based on non-public information (insider trading)

Prohibit fraudulent or misleading trading in the market (e.g., price manipulation or suppression).

Prohibit any actions that may disrupt market order.

If the above regulations are violated, in addition to a fine equivalent to twice the illegal profits, there may also be criminal liability.

Key Point Four: Cryptocurrency operators must ensure operational transparency and disclose important information.

In the future, cryptocurrency-related businesses will also need to regularly report important operational information to regulatory authorities, including their asset-liability status, trading volume, asset management mechanisms, and more. This measure aims to enhance market transparency and facilitate regulatory agencies in promptly grasping market risks.

Public consultation is underway, and businesses need to prepare in advance.

Currently, the South Korean Financial Commission has publicly solicited opinions from the private sector on this sub-law draft, which will last until April 22, 2024. At that time, adjustments will be made based on the collected opinions, and the final version of the regulations is expected to be officially implemented in July.

If cryptocurrency operators fail to comply with the regulations by this deadline, they may face risks such as license revocation and fines. Therefore, making internal system adjustments as soon as possible will be a top priority for trading platforms.

This article discusses that South Korea is about to implement the “Virtual Asset User Protection Act”: cryptocurrency exchanges are facing new challenges, and investors will have more protection. Originally appeared on Chain News ABMedia.