[korean crypto market] Virtual Asset User Protection Act goes into full effect on July 19...what's different?

[Korea Financial Times, Jeon HanSin] The 'Virtual Asset User Protection Act', which was enacted to establish a healthy order in the cryptocurrency (virtual asset) market and protect virtual asset users, will be enforced from the 19th. Users' deposits will be stored and managed by banks as authorized custodians, and unfair trade practices such as market price manipulation will be strictly regulated. In addition, financial authorities' supervision and sanctions on virtual asset exchanges will be strengthened.

On the 19th, the Financial Services Commission and the Financial Supervisory Service announced that the 'Virtual Asset User Protection Act', which is aimed at protecting the assets of virtual asset users, will be implemented in earnest from this day. The User Protection Act is the 'first business rights law' enacted in July last year, based on the vigilance after the Tena-Luna incident in 2022.

In the meantime, the virtual asset market has been subject to anti-money laundering-oriented regulations such as the Reporting and Utilization of Specified Financial Transaction Information (Special Act), which was amended in March 2021, including the Reporting System for Virtual Asset Businesses and Travel Pools. However, it has been pointed out that the Special Funds Act alone is difficult to actively respond to various unfair trade behaviors such as market price manipulation and has limitations in protecting users' assets.
In response, the financial authorities consolidated and coordinated 19 virtual asset-related bills pending in the National Assembly, centering on the essentials for user protection, prepared alternatives, and enacted the User Protection Act after in-depth discussions. The law was enforced after a one-year preparation period, including the enactment of subordinate regulations and preparations for the implementation of the law by virtual asset operators.

The User Protection Act stipulated ▲ protection of users' deposits and virtual assets ▲ regulation of unfair trade behaviors such as market price manipulation ▲ the authority of financial authorities to supervise, inspect, and sanction virtual asset operators and investigate and take action against unfair trade actors.

First, the user's deposit is stored and managed by the bank, and the virtual asset business must pay the user a deposit fee in the form of deposit interest. Deposits also include KRW points paid by virtual asset operators for marketing purposes.

The virtual asset business shall keep its virtual assets and the virtual assets of users separately, and shall hold substantially the same amount of virtual assets as the virtual assets of users. Accordingly, exchanges must store at least 80% of the virtual assets held by users in cold wallets. In order to fulfill its responsibilities in the event of accidents such as hacking or computer failure, the exchange must purchase insurance or accumulate reserves.

Cryptocurrency exchanges must also monitor abnormal transactions at all times and notify financial authorities if they suspect unfair trading behavior. Criminal penalties and fines may be imposed on those who engage in unfair trade behavior after investigation by financial authorities and investigative agencies.
Criminal penalties include imprisonment for more than one year or a fine of not more than three to five times the amount of ill-gotten gains. If the amount of ill-gotten gains exceeds 5 billion won, the penalty can be up to life imprisonment. In the case of a fine, an amount equivalent to twice the amount of ill-gotten gains will be imposed, and if it is difficult to calculate the amount of ill-gotten gains, it will be within 4 billion won.

Financial authorities can also supervise, inspect, and sanction virtual asset operators. The Financial Supervisory Service inspects virtual asset operators for compliance with user protection obligations under the User Protection Act, and the Financial Services Commission can impose sanctions such as corrective orders, suspension of all or part of the business, and fines on virtual asset operators that violate their obligations based on the inspection results.

The industry hopes that the inclusion of virtual assets in the system will restore investor confidence in the market. “Many investors felt uneasy about depositing and storing their assets due to the FTX bankruptcy, but with the implementation of the User Protection Act, they will feel 'safer' than before,” said an industry insider. ”Unfair trading behavior such as scam coins will also gradually disappear as financial authorities strengthen their supervision and sanctions.”

There are also growing calls for the second phase of the legislation, which will cover issuance regulation, distribution regulation, and issuance disclosure, to be discussed sooner rather than later. “The Democratic Party of Korea, which won the April 10 general election, has pledged to enact the second phase of the virtual asset law, so the legislation will speed up,” the official said. ”If the second phase of the law tightens regulations on virtual assets, the market will be more active.”

Jeon HanSin (pocha@fntimes.com)