South Korea Intensifies Oversight of Crypto Exchanges, Threatens Imprisonment

• South Korea's Financial Supervisory Service (FSS) is intensifying oversight of crypto exchanges to safeguard crypto holders.
• Complying includes abiding by the nation's revamped Virtual Asset User Protection Act.
• All South Korean Virtual Asset Service Providers (VASPs) must separate their funds from user deposits and have insurance policies in place in case of hacks or attacks.
• Violating the Act can lead to severe repercussions (includinglife imprisonment and large financial penalties).

South Korea's FSS will soon start inspecting crypto exchanges and other VASPs to ensure they comply with stringent regulations under the Virtual Asset User Protection Act.

There'll be severe consequences for violations - one of which includes life imprisonment for those who profit over $3.7M (5B won) from illegal digital asset transactions.

But what even is the Virtual Asset Users Protection Act, and how can South Koreans comply?

Major Implications for Virtual Asset Service Providers

Following a rocky start, the Virtual Asset User Protection Act (which consists of 19 crypto-related bills) was officially enacted on July 19 to safeguard virtual token holders from unfair trade practices.

The Korea Legislation Research Institute highlights the Act's many principles that all VASPs must comply with. Here's some of what it entails:

• Requires VASPs to separate their own funds from user deposits
• Mandates that all VASPs have insurance in case of vulnerabilities
• Asks all VASPs to immediately report suspicious trading activities
• Restricts VASPs from trading themselves (with few exceptions)
• Allows the Financial Services Commission (FSC) to inspect VASPs for suspicious activity (like price manipulation)
• Enables the FSC to issue VASPs penalties for violations

If failing to meet the Act's demands, the FSC's penalties are not to be shrugged at. Some include a penalty surcharge of double the amount gained, and at least a year's imprisonment, if not life.

For compliance, market participants are advised to stay abreast of the legislative process, currently in its second stage.

The Virtual Asset User Protection Act's Bumpy Beginnings

The Act's launch has been far from smooth sailing. Crypto-related enforcement was initially approved in July 2023 and given a year's grace period to polish the regulatory framework.

However, it was criticized in numerous ways for lacking an established structure, including which virtual assets the Act applied to. Central-bank digital currencies and certain' non-fungible tokens (NFTs) have been excluded since.

Bitcoin ETFs have certainly not helped matters. They sparked debates in South Korea about whether such financial instruments should be accepted within the country, further complicating legislative matters.

The FSC claims that Bitcoin ETFs could threaten financial market stability and the broader economy. However, South Korea's president asked the regulators to reconsider their conservative approach. The outcome is still undecided.

Verdict - Will Other Nations Follow Suit? Potentially

The Virtual Asset User Protection Act is undoubtedly a significant shift in South Korea's crypto stance.

While we favor the Act because it seeks to protect virtual asset holders and ensure fairness, we project that it could be fraught with challenges, partly owing to the contrasting opinions of South Korea's president and financial regulator.

If proven successful, these regulations might spur other crypto-accepting countries to tighten their regulations.

References

Click to expand and view sources

• The Act on the Protection of Virtual Asset Users to Take Effect from July 19 (FSC)
• Act on the Protection of Virtual Asset Users (The Korea Legislation Research Institute)
• Main Highlights and Implications of the Act on the Protection of Virtual Asset Users (LEXOLOGY)
• FSC Announces Guidelines on Determining NFTs' Status as Virtual Assets (asialaw)
• Why are South Korean Authorities Reluctant to Approve Spot Bitcoin ETFs? (The ChoSun Daily)
• South Korea's Presidential Office urges local regulators to reconsider stance on Bitcoin ETFs (Crypto Briefing)

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