November 21, 2024

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(123rf)

South Korea’s first law specifically designed to protect cryptocurrency investors took effect on Friday, bringing the virtual asset industry within legal boundaries.

The Virtual Asset User Protection Act aims to prevent unfair trading practices in the volatile crypto market, in response to how it was shaken by such incidents as the Terra-Luna crash and bankruptcy of crypto exchange FTX.

The new law defines virtual assets as electronic tokens with economic value that can be traded or transferred electronically. Though it includes cryptocurrencies, it excludes non-fungible tokens and central bank digital currencies from its scope.

Under the law, crypto exchange operators must deposit users’ deposits at trusted financial institutions, such as banks. The regulation aims to help protect users’ deposits even if the exchanges file for bankruptcy. The exchanges must pay part of the interest from the deposits to the users as well. Local exchanges are to pay an interest rate between 1 and 1.5 percent.

The exchanges also must maintain a certain portion of users’ entrusted virtual assets in a “cold wallet,” which refers to offline digital cryptocurrency storage, to prepare against events of accidents such as hacking and computer failures. To take responsibility for such incidents, the providers must also be enrolled in insurance or accumulate reserves.

The law also tries to guard against unfair trading practices such as price manipulation. Crypto exchanges are required to monitor abnormal transactions and report suspected cases of unfair trading practices, including unusual fluctuations of crypto prices or trading volume, to financial authorities.

Offenders who take profits from unfair trading practices could face imprisonment of 1 year or more, or a fine of 3-5 times the profits. If the amount of the unfair profits surpasses 5 billion won ($3.6 million), the person could face lifetime imprisonment.

The new act is the first phase of legislation aiming to promote sound market practices in the virtual asset industry.

A second phase of the act in the planning stage is likely to regulate players in the industry from the distribution of virtual assets to mandating disclosures. It is also likely to cover regulations on stablecoins, cryptocurrencies for which the value is pegged to other assets.

Previously, the Act on Reporting and Using Specified Financial Transaction Information Act, introduced in March 2021, was the only law here related to the virtual asset market. That act, however, was limited as it only focused on regulating money laundering activities.

By Im Eun-byel (silverstar@heraldcorp.com)