South Korea's FSC proposes rules to safeguard crypto users

The financial watchdog published suggested rules to protect digital asset customers under the Virtual Asset User Protection Act passed earlier in 2023

In a Dec. 11 press release, South Korea’s Financial Services Commission (FSC) proposed guardrails to oversee the operations of virtual asset service providers (VASPs) and cushion crypto users from financial risks.

Provisions in the act include requirements for custody of customer deposits using cold storage and criminal charges to curtail bad actors among both VASPs and virtual currency users. According to the FSC, operators like crypto exchanges should store 80% or more of their customers’ digital assets in cold wallets

Cold wallets are hardly connected to the internet and face fewer attack vectors than hot wallets, which are typically internet-linked to support frequent transactions

The FSC’s act also defined digital assets, noting that NFTs and CBDCs do not fall under the purview of proposed laws. The rules are open for public feedback until Jan. 22 and will be implemented on July 19 of next year.

The FSC’s proposal is part of efforts from South Korean authorities aimed at regularizing cryptocurrencies in the country and installing a comprehensive framework to guide service providers

In July 2023, South Korea launched its crypto crimes investigation unit to combat illicit schemes targeting digital asset users.

The FSC also announced specialized monitoring exercises on OTC trading desks and urged citizens to report unregistered crypto exchanges. Meanwhile, compliant platforms with bank-issued real-name accounts were instructed to reserve 30% of their daily average deposits or a minimum of 3 billion South Korean won, or the equivalent of $2.26 billion. The rule came into effect in September 2023.