The Financial Services Commission (FSC) has announced that the Virtual Asset User Protection Act, designed to create a secure environment in the virtual asset market and enhance user protection, will take effect on July 19.
Background
In March 2021, amendments were made to the Act on Reporting and Using Specified Financial Transaction Information, requiring virtual asset service providers (VASPs) to register with the financial authorities and implement anti-money laundering measures like the travel rule. However, it was noted that the existing framework, which focused primarily on anti-money laundering, was insufficient to address issues such as price manipulation or to fully protect users’ assets.
Recognizing the urgency of enhancing user protection, the Virtual Asset User Protection Act was enacted on July 18, 2023, incorporating key elements from 19 legislative bills under consideration by the National Assembly. Over the past year, subordinate regulations were developed, allowing VASPs time to prepare for the Act’s implementation on July 19, 2024.
Key Provisions of the Virtual Asset User Protection Act
The Act includes provisions to (a) protect user deposits and virtual assets, (b) regulate unfair trading practices like price manipulation, and (c) grant financial regulators the authority to supervise, inspect, and penalize VASPs, as well as to investigate and address unfair trading activities.
To ensure the safety of customer funds, deposits must be held securely in banks, and VASPs are required to pay fees as interest on these deposits. VASPs must keep users’ virtual assets separate from their own and hold the actual types and amounts of assets that customers possess. They are also required to have insurance or reserve funds to cover liabilities from hacking or other network-related issues.
Regarding unfair trading activities, VASPs must maintain a continuous surveillance system for suspicious transactions and promptly report such activities to the Financial Supervisory Service (FSS). After investigations by financial and law enforcement authorities, those found guilty of unfair trading practices may face criminal charges or financial penalties.
The new law empowers financial authorities to supervise, inspect, and penalize VASPs. The FSS is tasked with inspecting VASPs for compliance with user protection obligations, while the FSC is responsible for imposing sanctions, which may include corrective orders, business suspensions, or administrative fines.
Preparation for Implementation
To facilitate the smooth implementation of the new law, financial authorities have been preparing thoroughly. The FSC has developed subordinate regulations that provide detailed guidance. In February, the FSS offered VASPs a roadmap and on-site consultations to help them prepare. A pilot test was conducted in June to assess the readiness of both regulators and VASPs. Additionally, an insurance product to cover hacking and network malfunctions was launched in time for the law’s enactment. The Digital Asset Exchange Alliance (DAXA) and 20 virtual asset exchanges have also established best practice guidelines, setting minimum compliance standards and encouraging VASPs to provide critical information, including Korean translations of virtual asset whitepapers.
Expectations
The FSC expects that the Virtual Asset User Protection Act will lay the foundation for robust user protection and contribute to maintaining order in the virtual asset market. By enabling severe penalties for unfair trading activities, the Act is anticipated to foster a more secure market environment. Financial authorities intend to strengthen collaboration with investigative bodies and continuously seek improvements to ensure effective implementation of the new law.
A Note for Users
Virtual asset users should be aware that the Virtual Asset User Protection Act does not guarantee the safety of their virtual assets. Given the inherent risks and volatility associated with virtual assets, users are advised to make investment decisions carefully and at their own risk. Trading through unregistered service providers or engaging in over-the-counter (OTC) and peer-to-peer (P2P) transactions poses additional risks due to the absence of proper market surveillance mechanisms.
Users should also note that unfair trading practices similar to those seen in traditional financial markets are prevalent in the virtual asset market. They are encouraged to report any suspicious trading activities to the FSS and to notify investigative authorities if they suspect involvement in fraudulent schemes.
By FCCT Editorial Team
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