The South Korean government has given its approval to a decree that will enforce the Act on the Protection of Virtual Asset Users (PVAU). These two laws will both come into effect on July 19th.
The Enforcement Decree outlines the methods and procedures that the Financial Services Commission (FSC) will adopt to ensure the effectiveness of the PVAU. These include both proactive measures and oversight of procedures carried out in accordance with the PVAU.
The FSC will establish a committee consisting of government officials and private sector experts to develop a policy on virtual assets that are regulated under legislation other than the PVAU or those deemed to have no negative impact on users.
As part of the decree, the FSC will designate credible financial institutions that are eligible to manage customer deposits made to virtual asset service providers (VASPs). It is required that customer funds be separated from VASP funds and invested in “risk-free” assets under an agreement with the VASP, in order to generate a yield. In the event that the VASP is deregistered or goes bankrupt, the bank must directly return customers’ funds to them.
The FSC will also determine the minimum proportion of VASP customer digital assets that must be stored in cold wallets, which will be no less than 80%. Additionally, VASPs will have the ability to restrict deposits and withdrawals under specific circumstances. There are also regulations in place for reporting abnormal trading activities, with severe penalties, including life imprisonment, for violations. Furthermore, there are complex rules in place to differentiate between public and nonpublic information.
South Korea has significantly increased its enforcement actions in the crypto space in the past year. The PVAU was enacted into law in July 2023 but faced criticism for its lack of regulatory framework.
The introduction of Bitcoin (BTC) exchange-traded funds (ETFs) in the United States sparked controversy over the asset product in South Korea. The FSC urged local brokerages to refrain from investing in U.S. funds, but the office of the president opposed this policy. The leading party in the new government has also called for a change in the FSC’s stance on BTC ETFs.
The Enforcement Decree will be officially announced in early July.