South Korea has taken another leap in crypto regulation as recent announcements by the Financial Services Commission (FSC) shed light on the regulatory path ahead, impacting digital asset investors, trading platforms, and the broader crypto ecosystem.
In a pivotal move, the Korean government unveiled its comprehensive plan to regulate crypto assets, distinguishing between “security-type tokens” and other virtual assets. The Financial Investment Services and Capital Markets Act (FSCMA) will oversee security-type tokens, while a new Digital Asset Framework Act will address non-security-type tokens.
Effective July 19, 2024, the Virtual Asset User Protection Act aims to safeguard consumers and investors in the virtual asset market. It extends its jurisdiction extraterritorial, covering actions impacting the Korean market.
The FSC announced that starting July 2024, digital asset investors must earn interest on their exchange deposits. However, a nuanced approach excludes Non-Fungible Tokens (NFTs) and Central Bank Digital Currencies (CBDCs) from this requirement.
Exceptions for NFTs
While NFTs are explicitly excluded from the interest mandate, the FSC hinted at potential exceptions. Tokens with significant distribution and utility as payment mechanisms, even if categorized as NFTs, might qualify for interest when deposited on exchanges.
The FSC systematically categorizes virtual assets and mandates exchanges to entrust a bank with safeguarding user deposits separately. Additionally, 80% of digital assets must be stored in cold wallets.
In anticipation of potential hacks or cyber catastrophes, virtual asset service providers are directed to secure insurance or establish emergency funds. However, stringent laws prevent unnecessary restrictions on deposits or withdrawals.
South Korea Taking Crypto More Seriously in 2023
This comes as the second major step towards crypto regulation this year by South Korea. In response to a surge in illicit activities surrounding cryptocurrencies and the lack of regulatory safeguards for investors, South Korea established an interagency investigative team on July 26. This Joint Investigation Centre for Crypto Crimes comprises approximately 30 individuals from various government departments, including justice, finance, taxes, and customs.
The Prosecutors’ Office highlighted the need for legal protection for market participants involved in virtual assets, equating them to investment products comparable to stocks. The interagency team aims to fill the regulatory void, safeguarding investors until comprehensive laws control the cryptocurrency market.
Cryptocurrency-related crimes in South Korea witnessed a staggering 118% increase in damages over the last five years, reaching 1.02 trillion won ($797.81 million) in 2022. These crimes encompass various activities, such as price manipulation, illicit foreign exchange transactions, Ponzi schemes, and more.
Investigations will mainly target cryptocurrencies with substantial price volatility or facing de-listing. The focus areas include illicit trading activities, tax evasion, unauthorized foreign currency transfers, concealment of criminal earnings, and money laundering.
Despite being one of the world’s fastest-growing cryptocurrency markets a year ago, South Korea’s market capitalization plummeted by 66% due to various factors, including high interest rates and events that dampened investor enthusiasm. The crash of stablecoin TerraUSD and its creator’s involvement in fraudulent activities contributed to a public outcry and further regulatory scrutiny.
The statement from the Prosecutor’s Office highlighted a significant surge in transactions associated with criminal activity across local cryptocurrency exchanges. The numbers spiked from 66 in 2021 to a staggering 900 in 2022, marking a 1,263% increase and underscoring the urgency for regulatory measures to curb illicit practices in the cryptocurrency space.
South Korea’s regulatory landscape is evolving, with a dual approach that aims to establish interest requirements for digital assets while concurrently intensifying efforts to combat cryptocurrency-related crimes and protect investors.
