South Korea's Financial Watchdog Unveils Comprehensive Safeguards for Crypto Consumers

The South Korean authorities are escalating their regulatory efforts in the cryptocurrency sector, as illustrated by the recent unveiling of proposed regulations aimed at protecting customers of virtual asset services providers (VASPs), the regulator said on Monday. Presented by the Financial Services Commission (FSC) under the Virtual Asset User Protection Act, these regulations are scheduled to come into effect on July 19, 2024.

Enacted earlier this year, the Virtual Asset User Protection Act defines digital assets and establishes a legal framework for punitive measures, encompassing criminal penalties and fines. The primary goal is to address unfair trading practices involving virtual assets. Additionally, the Act mandates that VASPs, commonly referred to as exchanges, actively monitor and report any irregular transactions to the FSC.

To enhance consumer protection, the proposed regulations require VASPs to compensate customers for the use of their deposits. Furthermore, exchanges choosing to store their assets in banks must comply with guidelines allowing banks to invest these deposits in secure assets, such as government bonds.

The regulatory framework also mandates that exchanges store a significant portion, specifically 80% or more, of customers' deposits in cold wallets. These wallets, distinguished by their offline nature, offer heightened security against cyber threats compared to their online counterparts.

However, it's crucial to acknowledge that the proposed regulations have certain limitations. Non-fungible tokens (NFTs) and central bank digital currencies (CBDCs) are excluded from the scope of the Virtual Asset User Protection Act. The government's commitment to bringing clarity and oversight to the cryptocurrency sector was emphasized in July, with the announcement of draft rules requiring companies to disclose their ownership or holdings of crypto assets starting next year.

As part of a transparent and inclusive regulatory process, the proposed regulations are currently open for public comment until January 22. This allows stakeholders and the general public to contribute input and feedback before the regulations undergo finalization and implementation. These developments underscore South Korea's dedication to creating a secure and well-regulated environment within its rapidly evolving cryptocurrency landscape.

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