The Financial Services Commission announced that the Act on the Protection of Virtual Asset Users (“the Act” hereinafter) was passed at the National Assembly’s plenary session on June 30.

The newly established law on virtual assets is aimed at guaranteeing protection of assets held by virtual asset users, regulating unfair transaction activities in the virtual asset market and conferring the market oversight and sanctions authority to the FSC.

Virtual asset service providers have been regulated under the revised Act on Reporting and Using Specified Financial Transaction Information since March 2021. However, the current regulatory framework had limits where authorities are not able to actively respond to various types of unfair transaction activities, prevent damages incurred to the users of virtual assets and more effectively supervise and sanction VASPs and assist victims with relief measures.

Since the onset of this administration, the government has put forward establishing the infrastructure and regulatory framework on digital assets as a key policy agenda and has been supporting the relevant legislative process at the National Assembly. In August 2022, a private-public joint taskforce on digital assets was launched which established the following principles on the direction of creating a virtual asset regulatory framework—(a) working on a gradual and phase-by-phase introduction of regulations, (b) applying same regulations on the same service and same risk and (c) ensuring global regulatory consistency with major economies and international organizations. On April 25 this year, given the urgency of protecting virtual asset users, the legislative subcommittee of the National Policy Committee at the National Assembly decided to go ahead with an enactment of the least necessary regulatory measures. Then, a legislative bill integrating nineteen previously pending bills was prepared and passed at the plenary session of the National Assembly on June 30.

First, the Act establishes a set of rules that virtual asset service providers (VASPs) are required to follow to ensure protection of users’ assets. In this regard, VASPs are required to (a) manage their customers’ virtual asset transaction deposits separately from their own assets, (b) keep virtual assets owned by their customers separately from the virtual assets in their possession, (c) actually hold the types and quantities of virtual assets entrusted by the users of virtual assets while maintaining a certain proportion of virtual assets (to be determined by a presidential decree) in cold wallet storage, (d) have an insurance plan or set aside reserves to comply with the responsibility in the event of computer hacking or network crash, and (e) maintain records of virtual asset transactions for fifteen years to enable tracking and verification of transaction history.

Second, regarding the regulations on unfair transaction activities, the Act prohibits improper use of undisclosed material information, manipulation of market prices and fraudulent transaction activities (false reporting, intentional omission, etc.) while restricting VASPs from transacting self-issued virtual assets. In addition, VASPs are required to regularly monitor abnormal activities such as transactions involving extreme volatility in prices and volumes and take appropriate measures to ensure user protections. When finding suspicious transaction activities, VASPs need to immediately report to the financial and investigative authorities.

Lastly, the Act establishes a clear legal foundation conferring the supervisory and sanctions authority to the FSC. In particular, unfair transaction activities are subject to the minimum imprisonment of one year or a fine of at least three times and up to five times of unfairly gained profits. Gains from unfair transaction activities will be confiscated, and when unable to do so, authorities will pursue collection of an equivalent amount.

The FSC expects that the enactment of this legislation will help protect the users of virtual assets and promote soundness and transparency in their transactions. The FSC will prepare subordinate regulations to ensure the implementation of the Act as scheduled while working on various measures to establish market discipline in close coordination with the relevant authorities.

The newly enacted law is expected to go into effect in July 2024, one year after promulgation.

* Please refer to the attached file for details.