- Interest on crypto deposits mandated
- Stricter controls against insider trading
- Enhanced security measures for user funds
In a groundbreaking move to fortify investor protection and instill transparency in the burgeoning cryptocurrency market, South Korea’s Financial Services Commission (FSC) has unveiled plans to compel financial institutions to compensate crypto depositors with interest, effective July 2024.
Under the forthcoming legislative guidance, the “Enforcement Decree and Supervision Regulations of the Virtual Asset User Protection Act” will usher in a new era of accountability for crypto exchanges. Investors involved in crypto assets will now be entitled to interest payments on their deposits, marking a significant departure from traditional banking practices.
Notably, the revised regulations exclude non-fungible tokens (NFTs) and deposit tokens linked to central bank digital currency (CBDC) from the scope of assets covered by the law. The move is a strategic one, emphasizing a balance between innovation and investor protection.
Financial institutions acting as custodians for crypto exchanges will shoulder the responsibility of paying interest on user deposits. The aim is to safeguard user funds and provide investors with the opportunity to accrue returns on their capital.
To bolster security measures and mitigate risks, crypto asset operators are mandated to store over 80% of the economic value of users’ virtual assets in cold wallets. Additionally, in anticipation of potential hacking incidents, digital asset operators must secure insurance coverage or establish mutual aid programs. These measures require insurance or reserves amounting to more than 5% of the economic value of virtual assets stored in hot wallets.
The regulatory standards set by the FSC impose a minimum threshold of 3 billion won ($2.6 million) for won market exchanges and 500 million won ($433,000) for coin market exchanges or wallet/custodian services.
In an effort to strengthen controls against insider trading, the regulations stipulate that important information shared by digital asset businesses on exchanges will be deemed public knowledge after a six-hour disclosure period. The move aims to level the playing field and reduce the potential for unfair advantages in the market.
The FSC’s comprehensive regulatory framework also prohibits the blocking of users’ deposits and withdrawals in principle. Exceptions to this rule may be granted in cases of computer failures, hacking incidents, or when requested by courts, investigative agencies, or financial authorities in accordance with relevant laws and regulations.
Furthermore, crypto exchanges are required to actively monitor and report any abnormal transactions, promptly notifying financial authorities of suspected unfair trade practices. This stringent measure aims to curb market manipulation and ensure a fair trading environment for investors.
The regulatory overhaul comes as a response to past controversies involving crypto deposit and management businesses, such as Haru Invest and Delio, that faced criticism for suspending deposits and withdrawals without prior notice.
In summary, South Korea’s FSC is embarking on a comprehensive regulatory journey, introducing interest payments on deposits, enhancing oversight, and fostering an environment of trust to propel the responsible growth of the nascent cryptocurrency market in the country.
Disclaimer: Please note that the viewpoints and perspectives expressed by the author, as well as any individuals referenced in this article, are intended solely for informational purposes. They should not be construed as financial or investment advice. It’s important to acknowledge that investing in or trading cryptoassets carries inherent financial risks.