South Korea Takes a Proactive Approach to Crypto Regulation with the Virtual Asset User Protection Act

On July 18, 2024, South Korea saw the implementation of its first-ever cryptocurrency regulatory framework, the Virtual Asset User Protection Act.

South Korea took a major step towards regulating the cryptocurrency industry with the implementation of its first-ever framework on July 18, 2024. This legislation comes in response to the significant crypto-related financial setbacks witnessed globally in 2022, including the collapse of Terra-Luna and FTX.

The law aims to create a safer trading environment for investors in digital assets by introducing several risk mitigation strategies.

The Virtual Asset User Protection Act was passed a year prior and underwent extensive redrafting. It now mandates virtual asset exchanges to store 80% of client deposits in cold wallets, which are not connected to the internet, thereby enhancing security.

The new framework also requires cryptocurrency service providers to segregate customer funds from the company's funds. This is further reinforced by the requirement for exchanges to maintain crypto reserves equal to the amount and type of customer deposits.

Additionally, these exchanges are obligated to allow users to store their fiat deposits in licensed local banks. Furthermore, the law mandates crypto service providers to either have sufficient insurance or maintain a reserve fund, which will serve as a safety net in case of a hack or liquidity crisis.

Meanwhile, the South Korean Financial Services Commission (FSC) commenced a 24/7 monitoring system to identify irregular trading activities. It collaborates with local exchanges to pinpoint malpractice and safeguard the digital assets market from violation.

The Virtual Asset User Protection Act has a broad scope but currently only covers the offering of digital assets, not their creation. However, preparations are underway for possible further legislation to cover the issuance phase, which is still a subject of discussion.

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