- South Korea’s new crypto law has come into force today, changing how crypto-handling entities treat the asset class
- The Virtual Asset User Protection Act was approved on July 18 last year, with a one-year grace period for operators
- The new measures reflect South Korea’s efforts to create a safer and more transparent environment for cryptocurrency trading and investment
South Korea’s new crypto law is set to come into force today, marking a series of changes in the way that crypto-handling entities treat the asset class. The new law, called the Virtual Asset User Protection Act, was approved on July 18 last year and operators were given a one-year grace period to refine the regulation details. In this piece, we look at the key aspects of the regulations and the impact it will have on the crypto space in the country.
Investor Protection Measures
South Korea’s Virtual Asset User Protection Act mandates that Virtual Asset Service Providers (VASPs) separate customers’ virtual assets from their own holdings. To enhance security, VASPs must store at least 80% of customer assets in cold wallets, up from the previous requirement of 70%.
Additionally, VASPs are required to have insurance or set aside reserves to cover potential losses due to hacking or system failures. These providers must also maintain customer transaction records for a period of 15 years, ensuring that transaction histories can be tracked and verified.
Regulation of Unfair Trade Practices
The new legislation prohibits VASPs from engaging in unfair trade practices, such as using undisclosed material information, manipulating market prices, and conducting fraudulent activities. VASPs are obligated to monitor transaction volatility and report any abnormal activities to the authorities immediately.
If violations occur, the penalties include imprisonment or fines amounting to three to five times the unfairly gained profits, and all illegal gains will be confiscated by the government.
AML and Compliance Requirements
To comply with Anti-Money Laundering (AML) regulations, VASPs must appoint a Money Laundering Reporting Officer (MLRO) and implement comprehensive internal AML policies and procedures. This includes conducting customer due diligence, monitoring transactions, and reporting any suspicious activities.
Additionally, the Travel Rule requires VASPs to share information on the originator and beneficiary of transactions, such as names and wallet addresses, within three days upon request from the authorities.
Operational and Security Standards
Operational standards under the new law require VASPs to obtain certification from an information security management system (ISMS) and ensure that financial transactions are conducted through accounts with verified real names.
Banks acting as custodians for VASP customer funds are now required to invest these funds in secure assets like government bonds. This regulation aims to further secure customer assets and prevent misuse.
Exclusions and Specific Provisions
The Act excludes certain digital tokens, including non-fungible tokens (NFTs), from its provisions. Additionally, it grants the Financial Services Commission (FSC) the authority to supervise VASPs and impose sanctions to ensure compliance.
These measures reflect South Korea’s efforts to create a safer and more transparent environment for cryptocurrency trading and investment.
