S.K.’s FSC calls for regulation on online asset users' protection

Slated to take effect on 19 July 2024, the proposed regulations aim to safeguard virtual asset users and establish a secure order in virtual asset transactions. 

South Korea’s Financial Services Commission (FSC) has put forward detailed rules under the Act on the Protection of Virtual Asset Users, slated to take effect on 19 July 2024. The proposed regulations aim to safeguard virtual asset users and establish a secure order in virtual asset transactions. 

They outline the scope of virtual assets subject to the law, require virtual asset service providers (VASPs) to securely manage customer deposits and virtual assets, and provide statutory grounds for sanctions, including criminal penalties and fines for unfair trading activities using virtual assets.

The proposal adds electronic bonds, mobile gift certificates, deposit tokens linked to central bank digital currency (CBDC), and non-fungible tokens (NFTs) to the list of excluded tokens not covered by the Act.

VASPs are required to keep customer money separate from their own funds and deposit or trust them with credible financial institutions, with banks designated as custodian institutions. Custodian banks can invest these funds in safe assets such as government bonds.

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VASPs must store 80% or more of their customers' virtual assets in cold wallets, with the economic value calculated based on the total amount of each type of virtual asset multiplied by the average daily converted amount in KRW for the past year.

VASPs are mandated to purchase liability insurance with a compensation limit of at least 5% of customers' virtual assets stored in hot wallets or set aside the same amount as reserves. Minimum criteria for compensation limits or reserves are also established based on VASP types.

Material nonpublic information is considered public after six hours if disclosed through virtual asset exchanges and after one day if disclosed on coin issuers' websites with a White Paper. VASPs are prohibited from arbitrarily blocking user deposits and withdrawals without justifiable grounds, with specific conditions outlined for permissible blocking.

Additionally, VASPs are obligated to monitor abnormal transactions, report suspicious activities to authorities, and face fines for unfair trading practices.

The proposed rules are open for public comments until 22 January 2024 and are expected to be implemented from 19 July 2024, following legislative proceedings.