South Korea’s Financial Supervisory Service (FSS) is set to introduce robust regulations for virtual assets by July 2024. This legislative move aims to enhance investor protection and establish clear compliance guidelines for the burgeoning digital asset market.
Key provisions of the upcoming legislation
- Interest on crypto deposits: Investors engaging in crypto transactions through exchanges will now earn interest on deposits. This provision aims to align crypto banking services more closely with traditional banking practices.
- Exclusion of NFTs and CBDC-linked tokens: The legislation specifies that non-fungible tokens (NFTs) and deposit tokens linked to Central Bank Digital Currencies (CBDC) do not fall under the legal scope of virtual assets, distinguishing them from regular cryptocurrencies.
- Mandatory cold wallet holdings: A significant focus of the proposed regulations is on the security of customer assets. Virtual asset operators are required to store at least 80% of customer assets in cold wallets, which are offline storage methods providing enhanced security against cyber threats.
New compliance measures for virtual asset operators
- Segregation of user deposits: Operators must keep user deposits separate from their proprietary assets, securely placing them in banks. They are also obliged to distribute earnings as fees or interest to users when profits arise. Additionally, the banks used by crypto exchanges must pay interest on user deposits made through the exchange.
- Minimum reserve requirements: The legislation enforces a minimum reserve requirement for virtual asset exchanges. Exchanges must maintain a reserve of at least 30 billion won to prepare for various contingencies.
- Insider trading regulations: Similar to traditional stock markets, the new rules introduce regulations against insider trading in the virtual asset space. Exchanges are required to monitor transactions vigilantly and report any suspicions of unfair trading practices to financial authorities.
Balancing innovation with investor protection
While the new regulations aim to protect investors and ensure transparency in the crypto market, they also focus on balancing innovation with regulatory compliance. The Financial Services Commission (FSC) of South Korea is currently seeking public feedback on the proposals, with a goal to finalize the updated regulatory framework in the first half of 2024. These measures reflect South Korea’s proactive approach to regulating the crypto industry, adapting to emerging categories like NFTs while prioritizing investor protections.