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South Korean authorities have introduced a new update to the Virtual Asset Users Protection Act with stricter regulations against crypto market manipulation and illegal trading, where violators could face life imprisonment.
On February 7 2024, South Korea’s top financial regulator, the Financial Services Commission (FSC), announced that the new law aims to protect the rights of crypto investors and promote transparency. The report also highlighted that if the unfair profits derived from crypto profits exceed 5 billion won ($3.8 million), the violators can face up to life imprisonment. This move comes as the Bitsonic CEO faced 7-year prison for conducting a 10-billion won fraud. The FSC revealed its proactive measures ahead of the scheduled implementation of the Virtual Asset User Protection Act, which is expected to come into force on July 19, 2024, after the bill was enacted on July 18, 2023.
A legislative notice regarding the Enforcement Decree of the Virtual Asset User Protection Act and the Virtual Asset Industry Supervision Regulations by the 22nd of the prior month. The notice outlined that the Enforcement Decree and supervisory regulations aim to address various concerns within the virtual asset landscape, prohibiting market manipulation, illegal trading practices and the misuse of undisclosed material information related to digital assets.
To ensure compliance, the legislation imposes primary criminal punishment measures and fines for violations, including fixed-term imprisonment for a minimum of one year or a fine equivalent to three to five times the amount of illegal profits. In cases where unfair profits exceed 5 billion won, offenders may face a maximum sentence of life imprisonment, coupled with fines equivalent to twice the amount of dishonest gains.
Crypto Exchanges to Implement Rules
To bolster consumer protection within the digital asset industry, business entities, including digital asset exchanges, must adhere to stringent regulatory directives issued by financial authorities. The regulator noted, “The FSC’s authority to supervise and inspect virtual asset business operators and take action on unfair trading practices is also stipulated in the law.” The regulator added, “It’s competent to supervise whether virtual asset business operators comply with the Virtual Asset User Protection Act and inspect their business and status.”
As the regulation outlines, digital asset exchanges must ensure the secure management of bank user deposits for digital asset transactions. The economic value of 80% of users’ digital assets must be securely stored in offline storage, at a distance from internet-connected systems, to limit the risks of hacking or system failures.
Additionally, to counter potential risks, such as system failures or hacking, digital asset exchanges must either acquire insurance coverage or set aside reserves equivalent to over 5% of the total economic value of digital assets, excluding those stored offline. According to reports, these measures mitigate potential losses and safeguard users’ assets in unforeseen circumstances.
As previously reported, South Korea will oversee compliance with the Virtual Asset User Protection Act to ensure adherence to regulations by conducting routine inspections of digital asset business operators. In cases where authorities suspect violations, they may request data and statements from relevant parties to probe unfair trade practices such as manipulation. In cases of non-compliance, South Korea’s FSC has the authority to take measures against offending digital asset business operators.
This action may include corrective orders, referrals to law enforcement agencies, business suspension, and legal complaints, demonstrating the government’s dedication to maintaining regulatory standards within the digital asset industry. The development comes in response to a significant industry implosion involving Terraform Labs and its founder, Do Kwon, a South Korean national. In May 2022, Terra Luna cryptocurrency collapsed, and more than $450 billion was wiped from the market.
While South Korea is implementing stricter cryptocurrency regulations, it also ensures it does not stifle digital innovations. According to reports, South Korea’s Financial Supervisory Services are discussing allowing spot Bitcoin exchange-traded funds after the United States launch in January 2024.