Regulatory news from Asia: South Korea tightens the reins on crypto exchanges
South Korea’s new crypto law
With the country’s new comprehensive law on virtual asset user protection taking effect on 19 July, South Korean crypto exchanges started to implement novel monitoring systems. South Korea decided to take a stricter regulatory approach with the Virtual Asset User Protection Act (VAUPA) coming into force.
The new law introduced strict norms regarding the prevention of unfair trading practices in the crypto market. The country’s Financial Supervisory Service (FCC) announced that it is assuming a proactive role in monitoring atypical Bitcoin transactions and spotting potential red flags.
The FSS mentioned that suspicious transactions present deviations from the norm and are mainly characterised by unusual price ranges, broad sums, high trading volume, or too slow execution times.
Cryptocurrency exchanges in South Korea have been urged to take a proactive stance and provide data into the system to obtain compliance with the new regulations.
Getting ready for VAUPA
In 2022, the collapse of Terra had its outcome in a broad market loss exceeding $450 billion. The affair involved the company Terraform Labs and its founder, Do Kwon, who is a national of South Korea.
It is believed that Terra’s collapse prompted the country’s regulators to address similar issues and enhance investor protection.
Back in March 2023, the country’s National Assembly passed the Virtual Asset User Protection Act (VAUPA) and established a legal framework for regulating virtual assets.
VAUPA was officially enacted in February 2024 by the Financial Services Commission with the aim of taking effect on 19 July 2024. Cryptocurrency exchanges had approximately one year to prepare for the new legal requirements.
Before VAUPA took full effect, the financial authority announced that it has jointly prepared with the exchanges a document called ‘Abnormal Transaction Monitoring Guidelines’ to support the operation of detecting and reporting suspicious transactions.
What’s the problem with the new law?
The main problem with the new law is that it requires crypto exchanges operating in South Korea to establish strict monitoring mechanisms that will detect and report suspicious conducts to the financial authority.
Apart from fraudulent transactions, the law prohibits the use of insider information and market price manipulation.
The crypto market is still in its early days, but regulators have started to observe how it affects antitrust regulations. To gain insight into the interplay between crypto and antitrust, we suggest reading this article: ‘Antitrust and crypto: ‘Another bump in the regulatory road?’.
Therefore, cryptocurrency exchanges operation on the South Korean soil implemented a novel unfair trading monitoring system which builds upon the existing monitoring infrastructure, along with incorporating order book data and advanced data analysis tools and features.
One of the main elements of the novel monitoring requirements represents the order book data loading system; the new Act obliges crypto exchanges to safeguard and keep trading records at the time of order placement so that the financial authority can more easily detect occurrences of unfair trading activities.
VAUPA’s main purpose is to boost investor protection and maintain the integrity of the crypto market.
South Korea is not the first country to implement extra requirements for cryptocurrency exchanges or users. In the beginning of 2024, crypto users in the United Kingdom started receiving emails regarding novel legal requirements. To find out why users had to complete risk acknowledgement forms, check out this article: ‘UK crypto exchange user: Here’s how to safely complete new UK investor and risk acknowledgements’.
The mass delisting fear – is it justified?
While everyone in the South Korean crypto space has been preparing for new compliance requirements, the Digital Asset Exchange Alliance (DAXA) and approximately 20 local crypto exchanges have addressed their concerns and fears of a possible massive delisting of tokens.
DAXA was concerned about the ‘Best practices for supporting digital asset transactions’ guidelines which set out a legal framework for crypto platforms to review and delist virtual assets. The crypto community was concerned about reports that South Korean crypto exchanges would have to review the listing of over 6,000 altcoins in the upcoming 6 months to ensure compliance.
However, as stated by several industry experts, a massive delisting is not that likely to happen. In contrast, a part of the crypto industry believes that these changes could boost market stability and protect investors.
If you are new to crypto space, all these technical terms might sound confusing. To learn more about crypto and trading, check out Learn Crypto Academy’s available course.
A brief history of South Korea’s crypto regulation
South Korea was quick to adopt blockchain and cryptocurrencies and the country is regarded as something of a digital currency hotspot.
South Korea is one of the countries that did not hesitate to adopt crypto assets and blockchains. People can own crypto assets and trade them on licensed crypto exchanges. Even though crypto is not a legal tender in the country, it became popular with the locals.
The country had a crypto boom back in 2017, and one year later, the government decided to regulate crypto trading. While trading was allowed only from bank accounts with real names and identities, the former head of the FSS, Choe Heung-sik stated that the government supports crypto trading activities.
As a result, the 2021 Act on Report and Use of Specific Transaction Information was amended, requiring all virtual asset service providers to tighten up regulations on bank accounts.
The second regulatory change happened in 2022 when the regulator stated their plans to regulate security-type tokens based on a law known as the Financial Investment Services and Capital Markets Act (FSCMA). However, a few months later, the government created a taskforce to develop a more comprehensive regulatory framework.
That brings us to 2023 when VAUPA was enacted. In addition to the new comprehensive act, the regulator launched the Joint Investigation Centre for Crypto Crimes as a special investigation unit.
Main features of the new law
As stated in the Act itself, the purpose of VAUPA is to protect the rights and interests of virtual asset users and to promote the establishment of transparent and sound trading practices in the crypto market regarding the protection of users, the regulation of unfair trade practices and similar matters.
VAUPA consists of four main elements: the definition of virtual assets, the protection of users’ assets, the regulation of unfair trade practices and the supervision mechanism, and sanctions and penalties. Let us explain these briefly.
Defining virtual assets
VAUPA defines virtual assets broadly and states that they are electronic certificates that have economic value and that can be traded or transferred electronically, but they exclude assets, such as products regulated by other statutes and digital currencies issued by the Bank of Korea. VAUPA lays down a list of products that are excluded from this definition.
A broad definition of digital assets is common within many legal systems and there is no universally agreed definition. Terms such as crypto, digital, and virtual assets are sometimes used interchangeably; when reading a legal document, it is important to understand its context and purpose.
For example, the newly enacted Markets in Crypto Assets (MiCA) regulation in the EU defines crypto assets as digital representations of value of rights which may be transferred or stored electronically, using distributed ledger technology or similar technology.
When it comes to non-fungible tokens (NFTs), the South Korean financial regulator announced to prepare new guidelines to explain the application of the Act.
Protection of users’ virtual assets
VAUPA sets out new requirements on virtual asset service providers (VASPs) to safeguard users’ deposits by managing separate accounts and a user list. The protection of users’ assets is explained in Articles 6-9, and before getting into these new obligations, let us explain the meaning of a VASP.
According to VAUPA, a virtual asset service provider (VASP) refers to a person that engages in any of the following acts linked to virtual assets such as trading, the exchange of one virtual asset for another, the transfer of virtual assets, the safekeeping and administration of virtual assets, along with the provision of brokerage, intermediation or agency services in connection with these assets.
As a comparison, MiCA defines the crypto asset service provider as a legal person or other undertaking whose occupation or business is the provision of one or more crypto asset services to clients on a professional basis, and that is legally allowed to provide such services; the regulation further lists crypto asset services in a broader sense such as providing custody and administration, operating a trading platform, exchanging crypto assets for funds or other crypto assets, placing of crypto assets and so on.
Back to VAUPA- VASPs need to safekeep virtual assets of users and create and maintain a list of users containing information such as the name and the address of the user; the type and quantity of virtual assets; the user’s virtual address defined as the electronically generated unique identification numbers designed to manage transmission records and storage details.
VASPs have another obligation- they need to enroll in insurance or mutual aid programs or accumulate reserves in accordance with the published guidelines to fulfil their liabilities in the event of certain accidents. Finally, VASPs must retain records of transactions that enable the tracking and retrieval of details regarding trading and other transactions for 15 years.
Unfair trade practices
Article 10 stipulates the prohibition of unfair trade practices. Unfair trade practices refer to any business practices or acts that are deceptive, fraudulent or can breach the rights of the user. This term is typically linked to consumer protection laws.
VAUPA starts with laying down a list of persons that cannot use any material non-public information relating to virtual assets for trading in the relevant asset or engaging in other transactions, defining it as information that may significantly impact users’ investment decisions and has not been disclosed to many, unspecified persons.
The Act goes on with listing acts that are prohibited such as those that contain the intent to mislead others into believing virtual assets are actively traded, conspiring with others to purchase assets at the same price as the sale price, engaging in false trading with no intent to transfer or employing improper means, schemes, or tricks. VAUPA also mentions the prohibition of making false statements and using false market prices with the intent to encourage trading and other transactions.
These provisions resemble the norms of some existing laws in the domain of consumer protection and competition law, with the addition of the prohibition of discretionary blocking of deposits or withdrawals and the obligation to create mechanisms to monitor and report suspicious activities to the financial authority.
Supervisions and sanctions
Finally, the financial authority has the power to supervise the conduct of VASPs and monitor their financial status and business activities as VAUPA set out provisions for investigations and measures in response to unfair trade practices and against perpetrators.
For example, it prescribes certain enforcement mechanisms such as penalties for unfair trade practices, general penalty provisions, administrative fines, confiscation, and collection of assets as well as a one-year minimum sentence of imprisonment for specific violations defined in the law.
How to navigate the crypto legal landscape?
Please note that this article does not present legal advice. Always consult a qualified professional for clarification of legal documents.
Crypto regulations worldwide consist of a variety of laws and guidelines that regulate the trade and use of crypto assets. Even though these legal documents can differ from one jurisdiction to another, they cover several areas such as anti-money laundering, consumer protection and taxation.
If you are interested in learning more about crypto tax services as SaaS, why not read our guide: ‘How to use crypto tax services’.
To navigate the area of crypto regulations, you should conduct thorough research and understand all the prescribed obligations and associated risks. In the crypto world, it is important to stay informed and keep track of the latest regulations in your country. You can do that by checking out news sources, publications, and government sources.