🌎 South Korea Implements First Major Cryptocurrency Regulations

South Korea has introduced its first major set of cryptocurrency regulations aimed at safeguarding crypto investors in the nation. The framework, known as the Protection of Virtual Asset Users (PVAU), imposes stringent requirements on Virtual Asset Service Providers (VASPs).

Key Regulations Under PVAU

The PVAU mandates that VASPs hold at least 80% of users’ digital assets in cold storage. This measure aims to enhance the security of users’ funds by minimizing the risk of online attacks.

The Financial Services Commission (FSC) will designate credible financial institutions to manage fiat deposits for VASPs. These institutions will be responsible for segregating customer funds from VASP funds and investing them in low-risk assets to generate a yield. This ensures that, in the event of a VASP bankruptcy, customer funds can be directly repaid by these financial institutions.

Response to Past Market Crises

These regulations come in response to the collapse of major entities like Terra-Luna and FTX, which resulted in significant financial losses for investors. The collapses had a substantial impact on South Korea, with FTX alone seeing over 6% of its traffic from the country.

To further protect investors, VASPs are now required to have insurance or reserve funds to cover potential losses from hacks or liquidity crises. Additionally, the law allows VASPs to restrict user deposits and withdrawals under certain conditions, providing an extra layer of control over irregular activities.

Enhanced Monitoring and Real-Time Surveillance

The Financial Supervisory Service (FSS), the executive arm of the FSC, has established a real-time monitoring system in collaboration with cryptocurrency exchanges. This system aims for constant monitoring of abnormal transactions and was implemented on July 19, alongside the User Protection Act. According to the regulator, this system covers 99.9% of the country’s crypto trading volume. Any detected abnormalities must be reported to the FSS through a dedicated data transmission line.

When the system was introduced, 29 crypto exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, registered with the FSS for this purpose.

Future Tax Regulations

In addition to these measures, South Korea’s Ministry of Economy and Finance has postponed the implementation of a 20% crypto gains tax. Initially set to take effect next year, the ruling party is now considering delaying it until 2028.