The Korean Financial Services Commission (FSC) recently unveiled a comprehensive set of regulations aimed at protecting virtual asset investors and enhancing regulation in the local crypto industry. With devastating scandals like the Terra LUNA collapse in recent years, it is crucial to establish measures to ensure the security and stability of the virtual asset market.

Under the Act on the Protection of Virtual Asset Users, the FSC precisely outlines the types of virtual assets that fall under its regulation. This clarity is crucial in providing a framework for virtual asset service providers (VASPs) to adhere to. By defining the scope of virtual assets, the FSC sets the stage for effective regulation and oversight.

One key feature of the new regulations is the obligation placed on VASPs to manage and store customer deposits and virtual assets securely. The FSC recognizes the importance of safeguarding customer funds and has established measures to ensure their protection. Financial institutions, particularly banks, are designated as custodians for VASP customers’ funds. These institutions have the responsibility of investing these funds in secure assets such as government bonds. In cases where VASPs utilize customer deposits, they are obligated to compensate customers accordingly.

To enhance the security of virtual asset storage, the FSC has raised the bar for VASPs. The new regulations require VASPs to store a minimum of 80% of customer assets in cold wallets. This increase from the previous 70% requirement demonstrates a heightened focus on security and protecting customer assets from potential breaches or cyber attacks. By emphasizing the use of cold wallets, which are offline and less vulnerable to hacking, the FSC aims to mitigate risks associated with virtual asset storage.

The new regulations also address the need for financial safeguards against incidents such as hacking or computer failures. VASPs are now required to have liability insurance or set aside reserves to cover a significant portion of the customer assets stored in hot wallets. This ensures that in the event of unforeseen circumstances, customers’ assets remain protected. The proposal sets minimum criteria for these financial safety nets, taking into account different types of VASPs and their respective risk profiles.

To align virtual asset trading with conventional financial practices, the FSC’s proposal introduces specific criteria for determining when material nonpublic information becomes public in virtual asset markets. This rule aims to improve the detection of insider trading and promote fair and transparent trading practices in digital markets. By establishing clear guidelines, the FSC aims to instill confidence and trust in the virtual asset market.

The FSC’s proposal takes a firm stance against the arbitrary blocking of customer transactions by VASPs. Such actions are only allowed under necessary protective circumstances. This measure ensures that customers have the freedom to transact without undue interference. Additionally, VASPs will be required to monitor abnormal transactions and implement defined procedures for reporting suspicious activities. The proposal also introduces fines for unfair trading practices, reinforcing the importance of maintaining integrity and fairness in the virtual asset market.

The FSC’s comprehensive regulatory framework marks a pivotal step in establishing a secure and orderly virtual asset market. By introducing these regulations, the FSC aims to protect virtual asset investors, enhance oversight, and promote fair trading practices. The proposed rules are now open for public consultation, allowing stakeholders to provide input and shape the future of the virtual asset industry. With these regulations in place, the Korean crypto industry can strive towards a more stable and trusted ecosystem.

Regulation

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