Protect Investors, South Korea Tightens Digital Asset Rules

JAKARTA - The South Korean government continues to tighten regulations in the digital asset sector with the aim of protecting investors and maintaining the stability of the crypto market. Recently, the government issued a new regulation requiring crypto exchanges to have insurance to protect user assets in the event of bankruptcy or other unexpected situations, such as the liquidity crisis.

This rule is part of the Virtual Asset User Protection Act implementation, which took effect in July 2024. Financial Supervisory Service (FSS), as a financial watchdog, stressed the importance of this regulation to provide legal certainty in the use and offering of cryptocurrencies in South Korea.

With this insurance obligation, it is hoped that investors can feel safer because their assets remain protected, even though the crypto exchange used is facing financial problems. Several exchanges, such as GDAC and Hanbitco, which are currently experiencing financial difficulties, have reportedly taken steps to buy insurance to protect their users' assets.

Huobi Korea, the regional branch of the company led by Justin Sun, is also reportedly trying to buy insurance to ensure investor funds remain safe, even if the platform is closed at a later date.

Under this regulation, digital asset service providers (VASPs) are required to store at least 80 percent of user deposits in a cold storage wallet separate from the company's funds. In addition, user cash payments must be placed in licensed local banks, while crypto exchanges must also maintain crypto reserves equivalent to the number and type of user deposits. This step aims to minimize the risk of loss of assets due to hacking or other technical issues.

Any violation of this provision will be subject to strict sanctions, including the suspension of operations by the Financial Services Commission (FSC), the main financial regulator in South Korea. Although this regulation has tightened digital asset distribution rules, South Korea's President Fintech Society, Kim Hyoung-joong, stated that the country does not yet have a law governing the issuance of virtual assets.

However, South Korea remains known as one of the most crypto-friendly countries in Asia. The market for digital assets in the country is growing rapidly, with Won Korea surpassing the US dollar as the most widely used fiat currency for crypto trading in the first quarter of 2024. This reflects South Korea's important position in the global crypto ecosystem.