South Korean Regulator Proposes Crypto User Protection Rules

• South Korean FSC has proposed new crypto rules.
• The rules are expected to come into effect by next year.
• In the meantime, the proposal is open for public comment.

The South Korean financial watchdog has proposed detailed rules to protect virtual asset users and “establish a sound order” in crypto transactions.

The rules under this novel legislation cover wide-ranging areas, including the scope of virtual assets subject to the law, requirements for service providers to manage user deposits safely, and statutory grounds for sanctions to punish unfair trading activities.  

South Korea Proposes New Crypto Rules

In a press release dated December 11, the Financial Services Commission (FSC) announced its plan to introduce new crypto rules under the Act on the Protection of Virtual Asset Users.

Per the announcement, the proposal excludes various tokens from the Act’s coverage, including non-fungible tokens (NFTs), deposit tokens linked to CBDC, electronic bonds, electronic stocks, and mobile gift certificates.

Regarding user deposit custody, the proposal requires virtual asset service providers (VASPs) to keep customers’ money separate from their own funds and deposit or trust them to a credible financial institution. The Enforcement Decree settled on banks as a custodian institution.

Under the Act, VASPs will be required to store at least 80% of their customers’ virtual assets in cold wallets, up from the initial 70% threshold requirement for crypto service providers to get a certificate of Information Security Management System (ISMS) under the Act on Reporting and Use of Certain Financial Transaction Information.

Further, the proposed Act has provisions to enable VASPs to fulfill liability in the event of hacking or computer failure incidents.

Purchase of Liability Insurance for VASPs

If legislated, the Act will require VASPs to purchase liability insurance with a compensation limit of at least 5% of customers’ crypto assets stored in hot wallets.

The Act will also prohibit VASPs from “arbitrarily blocking user’s deposits and withdrawals” without justifiable grounds. The proposed legislation is open to public comment from December 11 to January 22, 2024, and is expected to come into effect by July 19, 2024.

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