South Korea Proposes Robust Rules to Protect Crypto Users
The South Korea Financial Services Commission (FSC) has released a comprehensive set of crypto rules under the Act on the Protection of Virtual Asset Users. The primary objective is to ensure the safeguarding of virtual asset users and establish a robust framework for orderly virtual asset transactions.
The proposed regulations cover a broad spectrum, starting with an expanded definition of virtual assets. The proposal adds electronic bonds, mobile gift certificates, deposit tokens linked to CBDC, and non-fungible tokens (NFTs) to the list of excluded tokens not covered by the Act.
Key Obligations for VASPs:
Safekeeping of Funds and Assets
- Banks designated as custodians for user deposits are kept separate from corporate assets.
- 80%+ of crypto assets must be kept in offline cold wallets.
- Monthly calculations are required to ensure sufficient holdings based on values.
Custodianship of customer funds is a critical aspect addressed in the proposal. VASPs are mandated to keep customers’ money separate from their own funds. In addition, banks will be designated as custodian institutions for VASP customers’ money. Custodian banks can invest VASP customers’ funds only in safe assets such as government bonds.
VASPs required to store 80% of customer assets in cold wallets
To enhance security, VASPs are required to store 80% or more of their customers’ virtual assets in cold wallets. Moreover, the economic value of customers’ virtual assets is calculated monthly.
The proposal also introduces criteria for insurance deductibles and reserves. VASPs need to purchase liability insurance or set aside reserves equivalent to 5% of customers’ virtual assets stored in hot wallets.
The proposal also addresses the issue of blocking deposits and withdrawals. In addition, the VASPs are prohibited from arbitrarily blocking user transactions without justifiable grounds. Exceptions include cases of computer failures, legal requests from authorities, or anticipation of incidents like hacking.
VASPA obligated to monitor abnormal transactions
Moreover, VASPs are obligated to monitor abnormal transactions regularly and report suspicious activities to financial and investigative authorities. Additionally, the FSC and FSS will conduct investigations, and fines for unfair trading practices may be imposed based on the prosecutor’s disposition.
The proposed rules are open for public comment until January 22, 2024. The rules are also expected to be implemented on July 19, 2024, following legislative proceedings.
