New South Korea Rules Shield Crypto User Deposits

Crypto investors in South Korea will have more peace of mind starting next month, thanks to new rules protecting users' balances in case of a crypto exchange bankruptcy.

The Financial Services Commission (FSC) on Tuesday announced that the government approved an enforcement decree aimed at boosting confidence in the country's digital asset market.

The recently passed virtual asset proposals offer more than safety nets for user balances during exchange failures. They represent a broader effort to regulate the crypto space in South Korea.

These measures will clearly define and categorize virtual assets and establish mechanisms to tackle unfair trading practices, effective July 19.

Under the decree, VASPs (Virtual Asset Service Providers) will be required to hold customer deposits separate from their company funds at reputable financial institutions. This move aims to minimize risks associated with exchange insolvency and enhance user trust in the Korean crypto market.

The custodian bank will step in if a VASP faces bankruptcy or closure. It will have to directly return user deposits to customers after publicly announcing the process through newspapers and websites.

Focus on Offline Storage of User Assets

VASPs must now store at least 80% of their users' digital assets in cold storage. Cold storage refers to offline, high-security systems that minimize the risk of hacking or loss. Additionally, the authorities can mandate an even stricter cold storage ratio for a specific VASP if there are concerns about security breaches, fraudulent activity, or potential business closure.

New Korean Law Means Tough Penalties for Fraud

The decree also cracks down on manipulative activities in the crypto market, with severe consequences for those caught cheating. Abusing the system to make money unfairly can now lead to criminal charges and hefty fines. Criminals could face at least a year behind bars or be fined up to five times the amount of their ill-gotten gains.

This month, a court upheld a 10-year prison sentence for a South Korean crypto fraudster, Wi, who exploited hundreds of investors out of $82.6m. Wi's scheme involved luring victims with the promise of "guaranteed" returns, ultimately landing him in hot water.

The new rules also grant VASPs the authority to restrict user deposits and withdrawals under specific circumstances.

Millions Seized in Recent Crackdowns

While South Korea has yet to tax crypto profits officially, the government's back-and-forth on introducing levies has created uncertainty. Tax authorities, however, remain vigilant, suspecting many are using crypto to conceal income.

The FSA reiterated that the government aims to create a safer and more transparent crypto market, provide greater security for crypto investors, and establish a more robust framework for the digital assets space.