South Korea officially implemented its first crypto law
South Korea's first cryptocurrency regulatory framework officially took effect today.
Since the disastrous Terra-Luna and FTX scandals in 2022, South Korea has quickly embarked on building a comprehensive legal framework for the crypto industry. Up to now, the new regulations have begun to take effect, the primary goal is to protect Korean investors.
The “Virtual Asset User Protection Act” was officially approved on July 18, 2024 and extended for one year to refine details.
According to regulations, exchanges are obliged to ensure the safety of at least 80% of customer deposits and store them in cold storage separate from company assets.
Exchanges must authorize the custody of user deposits to a licensed local bank and maintain cryptocurrency reserves equal to the amount and type of customer deposits. Furthermore, cryptocurrency services in South Korea must participate in insurance or set up reserve funds to respond to hacks or liquidity crises.
In addition to protecting user assets, the law also requires exchanges to set up real-time monitoring systems to report unusual transactions, with a high possibility of unauthorized access. Firms that do not comply with the new requirements will receive penalties or have their services suspended by the Financial Services Commission (FSC).
Earlier this month, the FSC also deployed a 24/7 local exchange monitoring system, to screen for any suspicious behavior in the crypto market, which went live at the same time as the new law.
Kim Hyoung-joong, President of the Korea Fintech Association, said the bill could bring local blockchain solutions to the global stage. However, the new regulations are still not comprehensive, Mr. Kim said:
"Korea has a strict separation policy between the issuance and distribution of virtual assets. The Virtual Asset User Protection Act only targets the distribution process, but there is no legal framework regulating the issuance virtual assets.”
South Korea's virtual assets law was originally planned to have two parts, and lawmakers are still discussing what to include in the next regulation. Some of the topics on the table are token issuer management, consideration of institutional investment bans on crypto and stablecoin regulations.
In other developments, South Korea on July 15 once again proposed to postpone the 20% crypto income tax to 2028. The Korean Ministry of Finance is expected to confirm the final stance later this month, as soon as tax revisions for next year are announced.
South Korea is one of the most dynamic cryptocurrency markets in the world. In Q1 2024, the Won was the most used fiat currency for crypto trading compared to the USD, according to data from Kaiko. According to the Financial Services Commission, about 6.5 million citizens, accounting for 12.5% of the country's population, used crypto as of the end of last year.
According to the new set of rules adopted by the Korean Digital Asset Exchange Association (DAXA), 1,300 tokens traded on the country's market will be re-evaluated to see if they conform to the new standards.
The Digital Asset Exchange Association (DAXA) joined with about 20 domestic exchanges to establish a new code of conduct for crypto companies across the Korean market.
DAXA said in a press release that the new self-regulation standard will be implemented on July 19. That same day, a regulatory framework that includes laws protecting cryptocurrency investors in the country will also take effect.
The release said:
“If a new cryptocurrency is listed in the future, exchanges will need to evaluate the token based on both appearance and quality standards.”
In terms of form, the new regulations set standards for issuer reputation, investor protection measures, security and legal compliance. They also emphasize that these are non-negotiable standards, meaning that if a token does not meet one of the above criteria, it will not be listed.
"Qualitative requirements are intended to comprehensively review and examine a project based on a variety of factors."
Token evaluation is scheduled to take place quarterly.
The new standard also requires exchanges to establish an independent decision-making body for token listings and carry out all listing and delisting decisions according to the latest set of rules. The decision-making process should be retained for 15 years to increase fairness and transparency.
Tokens already listed on the exchange also need to be re-evaluated according to new regulations. As of the end of 2023, there are 1,333 tokens being traded in South Korea and all will need to be re-evaluated within 6 months.
However, DAXA also reassured that there will be no mass delisting of Altcoins after the review, because previous exchanges have strictly complied with this new regulation.
In most crypto surveys, Korea is always one of the largest markets in the world, also known as a place with a diverse concentration of Altcoins. As Coin68 reported, the Korean Won was the most traded crypto currency in the first quarter of 2024.
Or according to The Block, Upbit, Korea's largest exchange, processed more than $30 billion in cryptocurrency transactions in June.
In June 2023, South Korea passed the Digital Asset User Protection Law, integrating 19 bills related to cryptocurrency. The Act aims to eradicate illegal practices in the market, such as using undisclosed information for crypto speculation, price manipulation or fraudulent trading.
The law also requires cryptocurrency service providers to protect more than 80% of their customers' deposits in cold storage and participate in insurance programs to compensate users for any risks. .
