South Korean Watchdog Proposes Comprehensive Rules for Crypto User Protection

South Korea's financial regulatory body, the Financial Services Commission (FSC), has unveiled a set of rules aimed at ensuring the safety and security of crypto users. The proposed regulations, part of a new Act on the Protection of Virtual Asset Users, are designed to create a stable environment for cryptocurrency transactions.

Scope of Virtual Assets Defined:The FSC's Proposal

In a press release on December 11, the FSC outlined the key aspects of the proposed legislation. It delineates the scope of virtual assets covered by the law, imposes requirements on service providers for the secure management of user deposits, and establishes statutory grounds for sanctions against unfair trading practices.

Exclusions and Custody Requirements:Tokens and Deposit Custody

The proposal excludes certain tokens from the Act's coverage, such as non-fungible tokens (NFTs), deposit tokens linked to Central Bank Digital Currencies (CBDC), electronic bonds, electronic stocks, and mobile gift certificates. To enhance user deposit security, virtual asset service providers (VASPs) are mandated to keep customer funds separate from their own, depositing or entrusting them to reputable financial institutions, with banks designated as custodian institutions.

Cold Wallet Storage and Insurance Mandates:Enhanced Security Measures

Under the proposed Act, VASPs are required to store a minimum of 80% of their customers' virtual assets in cold wallets, an increase from the previous 70% threshold. This adjustment aims to fortify the security protocols for crypto service providers seeking certification under the Act on Reporting and Use of Certain Financial Transaction Information.

Moreover, the legislation suggests that VASPs acquire liability insurance with a compensation limit of at least 5% of customers' crypto assets stored in hot wallets. This provision is intended to safeguard users in the event of hacking or computer failures.

User Protection and Prohibitions:Ensuring Fair Practices

The Act explicitly prohibits VASPs from arbitrarily blocking users' deposits and withdrawals without justifiable grounds. This measure aims to establish transparency and fairness in crypto transactions.

Legislative Timeline and Public Input:Upcoming Milestones

The proposed legislation is open for public comment from December 11 to January 22, 2024. If enacted, it is anticipated to take effect by July 19, 2024, marking a significant step in strengthening regulatory oversight and user protection in the South Korean crypto market.

While the proposed regulations aim to fortify user protection, their effectiveness will depend on successful implementation and adherence by all stakeholders.