The South Korean government has approved a decree on the enforcement of the Act on the Protection of Virtual Asset Users (PVAU). The two laws will come into force simultaneously on July 19.

The Enforcement Decree prescribes the methods and procedures the Financial Services Commission (FSC) will use to ensure the PVAU is effective. They are sometimes active steps and sometimes oversight of procedures carried out in accordance with the PVAU.

No virtual asset users protection without enforcement

The FSC will organize a committee of government officials and private sector experts to develop a policy on virtual assets that are regulated under legislation other than the PVAU or “deemed to pose no harm to users.”

Related: South Korea looks to upgrade status of crypto crime unit

The FSC will designate credible financial institutions that are eligible to manage deposits made by customers to virtual asset service providers (VASPs). Customer funds must be segregated from VASP funds and invested under an agreement with the VASP in “risk-free” assets to generate a yield. In case the VASP is deregistered or goes bankrupt, the bank must return customers’ money directly to them.

The FSC will determine the proportion of VASP customer digital assets that must be stored in cold wallets. The proportion will be no less than 80%. Deposits and withdrawals can be limited by VASPs under specific circumstances. There are rules for reporting abnormal trading activities, with punishments of up to life imprisonment and complex rules for determining public from nonpublic information.

Virtual asset regulation requires organizing

South Korea has stepped up crypto-related enforcement actions markedly in the last year. The VPAU was passed into law in July 2023 and was criticized on various fronts for lacking regulatory framework.

The introduction of Bitcoin (BTC) exchange-traded funds (ETFs) in the United States led to controversy over the asset product in South Korea. The FSC urged local brokerages to avoid the U.S. funds, but the office of the president spoke out against that policy. The leading party in the new government has also pressed the FSC to change its stance on BTC ETFs.

The Enforcement Decree will be promulgated — officially announced — in early July.

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