South Korean regulators have always been cautious about embracing cryptocurrency. While not as skeptical as their counterparts in China, nor are they as open-minded as regulators in Japan – which decided more than five years ago to accept rather than fight crypto.
The standalone digital asset bill passed by South Korea’s parliament on June 30 came about following the fallout from the US$40 billion collapse of the TerraUSD and Luna tokens. The mastermind behind that debacle, South Korean citizen Do Kwon, was recently jailed in Montenegro for document forgery. The four-month sentence Do is currently serving in the Balkan country could pale in comparison to what he might face in either his home country or the United States. Both countries have requested his extradition to face criminal charges related to the implosion of his erstwhile digital assets empire.
Retail investors suffered the most from Do’s skullduggery and it is they whom South Korean regulators have in mind with this new law, aptly named Virtual Asset User Protection legislation. The code defines digital assets and penalizes behavior like using nonpublic information, market manipulation and unfair trading practices. The legislation empowers South Korea’s Financial Services Commission (FSC) to supervise crypto operators as well as asset custodians. The Bank of Korea will also able to probe such platforms. The act requires insurance coverage, reserve funds and necessary record keeping. The rules cover digital assets such as Bitcoin, while current capital-markets law applies to tokens deemed securities.
There are some important practical implications of the law. For instance, virtual asset service providers (VASPs) now must take responsibility for customers' deposits and provide insurance to shield investors from risks like hacking and computer failure. Breaking the new guidelines could result in a fixed-term prison sentence of a minimum of one year or a hefty fine. The FSC can impose a fine twice the amount of gains made by unfair trade.
Lee Suh Ryoung, chief secretary general of the Korea Blockchain Enterprise Promotion Association in Seoul, told Bloomberg that his organization supports the authorities’ “attempt to build” order but believes the law may not facilitate the crypto industry’s healthy development because it “in general remains stuck in the perspective of traditional finance in terms of regulating crypto.”
We think that the legislation was bound to disappoint the crypto faithful, who want bespoke guidelines that will help the digital assets industry become larger and more mainstream. With the jury still out on decentralized virtual currencies, we cannot blame South Korea’s FSC for proceeding with caution.
After all, they do not want South Korea to spawn another TerraForm Labs.