- 1 The “Virtual Asset User Protection Act” in South Korea will be implemented on July 19, 2024.
- 2 The Financial Services Commission notified the guidelines according to which non-fungible tokens (NFTs) would be considered virtual assets.
The Virtual Asset User Protection Act has been approved and will be imposed as an act in South Korea with effect from July 19, 2024. The act is aimed at protecting users of virtual assets from fraud and
The act will define the scope of virtual assets subject to the law and will require all the virtual asset service providers (VASPs) to manage and store their customers’ deposits and virtual assets with all the safety and security. The characteristics that are described in the latest update are discussed in this article.
As per this new act, the virtual assets are defined as electronic tokens with economic value which can be traded or transferred on electronic exchanges.
Virtual Asset Classification as per the Law
Initially, it was communicated that after the successful enforcement of Virtual Asset User Protection Act, all the NFTs will fall under the asset category of virtual assets. However, it was later clarified that the NFTs that meet the criteria of virtual assets and report their business to the authorities will be considered as a part of virtual asset class.
It will exclude assets like game money, electronic money, electronic stocks, electronic bills, electronic B/L and central bank digital currency (CBDC) to be covered under the law. Other assets that are excluded include electronic bonds, mobile gift certificates, deposit tokens linked to CBDC and non-fungible tokens (NFTs) traded for content collection purposes.
The quantity, divisibility, uniqueness and parties involved are other characteristics that will be considered.
Financial Institutions should be Custodians for VASP Customers
It describes the kinds of financial institutions that are approved to be custodians of VASP customers’ money and the methods used to manage customers’ funds. VASPs’ own funds should be separated from clients’ funds. The credibility, stability and current systems of operating deposit will be considered for VASPs.
Storage of Customers’ Virtual Assets
VASPs are required to store more than 80% of the customers’ virtual assets in cold wallets as per the new act. The amount of storage depends on the economic value of virtual assets’. It is calculated as the total amount of virtual assets multiplied by the average daily converted amount in KRW for the past.
The value is to be calculated on a monthly basis.
Criteria for Insurance deductibles or reserves
The act will establish criteria for insurance deductibles or reserves for VASPs to fulfill liability in the event of incidents such as hacking or computer failures. The VASPs are required to purchase liability insurance with a compensation limit of at least 5% of customers’ virtual assets stored in hot wallets.
The amount of this compensation limit or reserve should also be calculated on monthly basis.
Time-frame to act on material non-public information
Material non-public information is information that is not known to the common public but whose knowledge can have a significant impact on the market. The information will be considered public three hours after the disclosure through the system of FSS or KRX.
However, the virtual asset market allows trading on material, non public information but regulatory practices on unfair practices will be introduced under the act.
If any information is released on the official website of asset issuers through a white paper, it will be considered public one day after the release.
Restrictions on Arbitrary Blocking
The act prohibits VASPs from arbitrarily blocking their customers’ deposits and withdrawals without proper justification. If such cases are reported, VASPs might be forced to compensate users for their damages.
If the proper justification is available, then also VASPs are required to notify in advance before blocking services.
Monitoring Abnormal Transactions
The proposal will set up duty and a procedure to monitor abnormal transactions on VASPs. It will impose a fine for unfair trading practices. VASPs will regularly monitor abnormal practices that include extreme price volatility and trading volumes that led to suspicious transactions.
More clarity will be achieved on the successful implementation of the act.
Disclaimer
The analysis given above is for informational and educational purposes only. You should not take it as financial, investment, or other advice. Investing in or trading crypto assets is risky. Please consider your circumstances and risk profile before making any investment decisions.
