New regulations tighten control over crypto businesses in South Korea.
The Protection of Virtual Asset Users (PVAU) framework has imposed strict requirements on Virtual Asset Service Providers (VASPs). Under these rules, VASPs must store at least 80% of user’s digital assets in secure offline storage, known as cold storage.
Boosting security for user funds. The Financial Services Commission (FSC) will select reputable financial institutions to manage deposits made in traditional currency (fiat) for VASPs. Additionally, VASPs are required to keep customer funds separate from their own company funds. These customer funds must be invested in low-risk assets to generate returns for users.
This safeguard ensures that if a cryptocurrency exchange goes bankrupt, the respective financial institutions will directly reimburse customer funds.
These measures are a direct response to the collapse of Terra-Luna and FTX, which wiped out billions of dollars in customer funds. Both implosions significantly impacted South Korea, especially FTX, which had over 6% of its traffic from the East Asian country.
In addition to these mandates, VASPs are also required to be insured or maintain a reserve fund to mitigate damage in the event of a hack or liquidity crisis.
Furthermore, the law includes provisions for VASPs to restrict user deposits and withdrawals under certain conditions, offering greater control over irregular activities.
The Financial Supervisory Service (FSS), the executive arm of the FSC, has also established a real-time monitoring system in collaboration with cryptocurrency exchanges for the “constant monitoring of abnormal transactions.” This system was set to be implemented on July 19, alongside the User Protection Act.
The regulator claims this system will cover 99.9% of the country’s crypto trading volume. If any abnormalities are identified, they must be reported to the FSS via a dedicated data transmission line.
When the system was introduced in early July, 29 crypto exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, registered with the FSS.
The recent enforcement follows South Korea’s Ministry of Economy and Finance delaying the 20% crypto gains tax, originally set to be implemented early next year. The nation’s ruling party is reportedly considering postponing it to 2028.
