South Korea has just implemented its first major set of cryptocurrency regulations aimed at protecting investors in the nation. The new framework introduces stringent requirements for Virtual Asset Service Providers (VASPs). Dubbed the “Protection of Virtual Asset Users” (PVAU), the regulation mandates VASPs to hold at least 80% of users’ digital assets in cold storage.

📜 New Security Standards for Digital Assets

The Financial Services Commission (FSC) will designate credible financial institutions to handle fiat deposits made towards VASPs. Furthermore, VASPs must segregate customer funds from their own and invest them in “risk-free” assets to generate yield.

🛡️ Customer Funds Protection

This measure ensures that in the event of a cryptocurrency exchange going bankrupt, the designated financial institutions would directly repay customer funds. These measures are a direct response to the collapse of Terra-Luna and FTX, which wiped off billions of dollars worth of customer funds. Both entities’ implosions heavily impacted South Korea, especially FTX, which saw more than 6% of its traffic come from the East Asian country.

💼 Additional Security Measures for VASPs

In addition to the aforementioned mandates, VASPs are also required to be insured or have a reserve fund in place to mitigate damage in the event of a hack or liquidity crisis. Moreover, the law includes provisions for VASPs to restrict user deposits and withdrawals under certain conditions, offering further control over irregular activities.

📈 Real-Time Monitoring

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 “constant monitoring of abnormal transactions.” The system’s implementation was set for 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.

⏳ Postponement of Crypto Gains Tax

The recent enforcement follows South Korea’s Ministry of Economy and Finance delaying the 20% crypto gains tax set to be implemented early next year. The nation’s ruling party is reportedly considering postponing it to 2028.