Author: Weilin, PANews
Recently, South Korea's virtual asset regulators have frequently announced new regulatory developments, and there has been a "reversal" in the news. First, there were online rumors that the regulator "notified nearly 30 registered exchanges to review the more than 600 cryptocurrencies they listed therein" and "16 tokens will be delisted." Subsequently, the market fell into a panic of large-scale delisting of tokens, and the prices of related tokens fell sharply.
On June 18, the Financial Services Commission (FSC) of South Korea clarified that it would not directly participate in the inspection of cryptocurrencies listed on Korean exchanges, which was actually a self-inspection by the industry. In fact, in order to cooperate with the "Virtual Asset User Protection Act" that came into effect on July 19, South Korea's cryptocurrency-related regulatory agencies and self-regulatory organizations are taking the initiative to "attack".
Regulators set up a "suspicious" activity monitoring system and reviewed 1,333 virtual assets in 6 months
The latest news is that on July 4, the Financial Supervisory Service (FSS) of South Korea said in a statement that it is establishing a 24-hour monitoring system to monitor abnormal cryptocurrency trading activities, and recommended that exchanges enter data and information into the system to ensure compliance with the Virtual Asset User Protection Act that came into effect on July 19. The statement pointed out that red flags include trading volumes and prices outside the normal range, excessive trading volume, and abnormally slow execution speed. The Financial Supervisory Service said that one of the goals of the measure is to find accounts associated with "suspicious" activities.
This statement is one of a series of recent regulatory developments in South Korea. In mid-June, a list of "currencies that may be delisted in the Korean won market in June" was circulated in major Korean virtual currency communities and social media, involving 16 tokens, causing the prices of about half of the listed currencies in the Korean won market to plummet. At the same time, it was reported that the regulator notified nearly 30 registered exchanges to review more than 600 cryptocurrencies.
But on June 18, South Korea’s Financial Services Commission (FSC) clarified that it would not directly participate in the inspection of cryptocurrencies listed on Korean exchanges.
Soon after, on July 2, DAXA, an alliance of South Korea's five largest cryptocurrency exchanges, announced the launch of a six-month re-evaluation plan for 1,333 digital assets. DAXA said that in order to cooperate with the implementation of the "Virtual Asset User Protection Act", it has formulated the "Self-regulatory Management to Support Virtual Asset Transactions", which will be officially implemented on domestic exchanges together with the "Virtual Asset User Protection Act" on the 19th of this month. For more than 1,333 virtual assets, the exchange will conduct a virtual asset re-examination within 6 months from the implementation date. The formulation of this self-regulatory management was carried out in accordance with the requirements of regulatory authorities such as the Financial Services Commission and the Financial Supervisory Service, and the opinions of experts were collected.
Under the reassessment plan, 29 cryptocurrency trading platforms including Upbit, Gopax and Bithumb will assess whether their listed tokens comply with the new regulations, which will also serve as a benchmark for future token listings.
In addition, for overseas virtual assets, the alliance plans to implement a more flexible "replacement review program", which will relax some review conditions if the virtual asset has been traded in a qualified overseas virtual asset market for more than 2 years. DAXA is currently identifying eligible foreign exchanges, including those recognized by the International Organization of Securities Commissions (IOSCO).
South Korea's Virtual Asset User Protection Act will take effect
The Virtual Asset User Protection Law, which will take effect on July 19, aims to protect virtual asset users and establish a healthy market order. The Virtual Asset User Protection Law defines the definition of virtual assets and the excluded objects of virtual assets, and stipulates the obligations of virtual asset operators to safely store and manage user deposits and virtual assets.
The specific contents include: adding virtual assets to the exclusion list (the "CBDC" issued by the Bank of Korea is not included in the scope of virtual assets); requiring virtual asset business operators to separate users' deposits from their own property and deposit or hold them in a management institution, such as a bank; requiring virtual asset operators to keep more than 80% of user deposits in cold wallets to protect user funds and participate in insurance plans to provide potential compensation to users in the event of security breaches. In addition, the use of undisclosed material information, manipulation of market prices, and fraudulent trading behaviors are defined as unfair trading behaviors in box trading. If violated, they shall bear the responsibility for compensating losses and may be fined; it is prohibited to arbitrarily block users' access to virtual assets, and virtual currency exchange operators are required to monitor abnormal transactions in the virtual asset market at any time, take appropriate measures, and notify financial regulatory authorities, etc.
The most powerful protection for users is that when a virtual asset company goes bankrupt or its industrial and commercial registration is cancelled, the bank as the management agency will announce the deposit payment time and place in newspapers and websites, receive the user's deposit data, and pay the deposit directly to the user after confirmation by the virtual asset operator.
On the basis of these contents, the bill clarifies the establishment of the Virtual Asset Committee. On June 18, the proposal of the Financial Services Commission of South Korea to establish a new Virtual Asset Committee passed the State Council meeting. With the formal organization, a total of 12 employees have been transferred to full-time positions, and a new level 5 civil servant in charge of artificial intelligence in the financial field has been added. The Asset Committee will operate temporarily and be responsible for the management and supervision of establishing virtual asset market order and user protection. At the same time, the Virtual Asset Committee also plans to actively respond to unfair transactions of virtual assets and impose sanctions such as fines and criminal prosecutions.
From the background of the Virtual Asset User Protection Act, South Korea already has the 2021 "Amendment to the Specific Financial Information Protection Act" from the perspective of anti-money laundering, which introduces a review system for virtual asset practitioners. However, in terms of protecting users, legislators believe that the law still has room for improvement, so the discussion on virtual asset legislation is very active, centered on members of Congress. In April 2023, legislators reached an agreement to formulate the Virtual Asset User Protection Act, which focuses on the most urgent user protection. Since then, the two sides have reached an agreement on gradually and phased improvement of legislative matters.
South Korean won becomes the world's most active cryptocurrency in Q1, with mixed views on the impact of new legislation on the market
The importance of the Korean cryptocurrency market is growing. In the first quarter of 2024, the Korean won was the world's most actively traded currency against crypto assets, surpassing the US dollar. According to data from research firm Kaiko, in the first quarter of 2024, the cumulative trading volume of the Korean won on centralized cryptocurrency exchanges was $456 billion, while the US dollar was $445 billion.
The growth in won-denominated trading is partly the result of an ongoing fee war among South Korean exchanges. Smaller exchanges such as Bithumb and Korbit have recently launched zero-fee trading promotions in an attempt to attract traders from Upbit, which dominates the local market with a market share of more than 80% in spot trading volume.
In South Korea, users prefer to trade smaller, more volatile altcoins over more mainstream cryptocurrencies like Bitcoin and Ethereum. On average, transactions involving smaller market cap tokens account for more than 80% of all activity in South Korea.
Meanwhile, crypto activities are attracting more attention from young Koreans. A recent survey showed that more and more young Koreans are looking at cryptocurrencies and stocks as alternative investment options for retirement, and more than half of respondents aged 20 to 39 do not trust the national pension system. It is worth noting that about 7% of election candidates own digital assets in their asset disclosures.
Now, the new legislation marks a new stage in South Korea’s virtual asset regulation. In response to the new legislation, Matt Younghoon Mok, senior attorney and partner at Lee&Ko Seoul Law Firm, said that the guidelines of the Financial Supervisory Service of South Korea may pose a major challenge to altcoins that cannot quickly meet regulatory requirements.
However, DAXA, the alliance of the five major exchanges mentioned above, explained: "The major exchanges have already adopted the main review project in advance, and the re-examination under the new self-regulatory standards will be phased in over 6 months, so it is unlikely that there will be a one-time large-scale delisting."
Meanwhile, South Korean industry insiders are optimistic that the implementation of the Virtual Asset User Protection Act may enhance the competitiveness of the domestic virtual asset market. Yoon Chang-pei, a researcher at Upbit's Investor Protection Center, said: "The impact of regulatory measures must be viewed from a long-term perspective. We may not see an increase in liquidity in the short term." He added: "The core of the Virtual Asset User Protection Act is to enhance market stability, and around protecting virtual asset investors and expanding market stability, it may promote business expansion and innovation in the future."
Kim Myung-woon, former director of the Seoul Eastern District Prosecutors' Office, analyzed that as the scale of cryptocurrency transactions has grown exponentially, various side effects and related crimes have also increased. For example, there are virtual asset price manipulation cases such as PICA worth 90 billion won, undeclared illegal virtual asset exchange operations worth 580 billion won, and Haru Invest deposit cases worth 1.4 trillion won. When handling the above cases, the provisions of the Criminal Law on fraud or violations of the Amendment to the Specific Financial Information Protection Act are mainly applied to convict, but the existing laws are difficult to fully cover the transaction relationship in the special field of virtual assets, so there are some shortcomings in solving the problem. Due to this particularity, in order to prove the suspicion of crimes related to virtual asset transactions, such as the existence of fraud, the causal relationship between errors and disposal behaviors, etc., the investigative authorities need to invest more effort and time than other cases.
“Some people believe that the implementation of the new law will lead to a decline in virtual asset transactions, such as the prohibition of ‘market making’ (MM), cold wallets (offline wallets isolated from the Internet), real-time monitoring of suspicious transactions and reporting to financial authorities. However, I believe that through the implementation of the new law, virtual asset transactions will be fairer and more transparent, preventing speculative transactions from monopolizing the interests of specific forces, which will in turn make the virtual asset trading field more active.”
