South Korea’s inaugural crypto law goes into full effect

South Korea’s first crypto regulatory framework is now in full effect. Put on a fast track following the disastrous collapse of Terra-Luna and FTX in 2022, the new set of rules focuses on ensuring safety nets for cryptocurrency investors.

The new law — the Virtual Asset User Protection Act — was officially approved on July 18, 2024, and was given a one-year grace period to refine the regulation details.

The act imposes stricter requirements for digital asset exchanges. Service providers in South Korea are now legally obligated to safekeep at least 80% of user crypto deposits in cold storage separate from their own funds.

Exchanges must also delegate the custody of users’ cash deposits to a licensed local bank and maintain cryptocurrency reserves equal in amount and type to customer deposits. Furthermore, crypto services in Korea are now required to enroll in adequate insurance or establish a reserve fund in preparation for hacks or liquidity crises.

Apart from measures to safeguard user funds, the act mandates exchanges to set up real-time monitoring systems to report irregular trading activities that could potentially be illegal. Companies that do not abide by the new requirements could face penalties or service suspension from the Financial Services Commission (FSC), the country’s top financial regulator.

The FSC also recently unveiled a 24-hour surveillance network with local exchanges that will screen for any suspicious activity in the cryptocurrency market that went live along with the new law.

Kim Hyoung-joong, president of the local think tank Korea Fintech Society, told The Block that the new law established a regulatory system that could open the gateway for local blockchain solutions to expand globally. However, he pointed out that the law needs to be extended beyond its current framework.

“Korea has a policy that strictly separates the issuance of virtual assets and the distribution of virtual assets,” Kim said. “The Virtual Asset User Protection Act regulates distribution. However, there is no law yet to regulate the issuance of virtual assets.”

The think tank leader added that the regulators are also overlooking means to promote the growth of the local crypto industry, which must be coupled with strong regulation.

Meanwhile, South Korea’s virtual asset law was initially planned as a two-part legislation, and lawmakers are currently discussing what needs to be included in the follow-up regulation. Regulating token issuers, reviewing the ban on institutional investment in crypto and stablecoin regulations are some topics being evaluated.

The country hosts one of the world’s largest cryptocurrency markets. In the first quarter of 2024, the Korean won was the most-used fiat currency for crypto trading over the U.S. dollar, according to Kaiko data .