South Korea passes a cryptocurrency law that will take effect in a year to safeguard investors

According to the National Assembly’s official website, South Korea’s National Assembly on Friday adopted a measure that aims to safeguard the rights of cryptocurrency investors as the first step in creating a legal framework for such digital assets. In a year, the legislation, which is officially known as the Virtual Asset User Protection Act, is anticipated to become a law.

Quick facts

The measure, which combines 19 legislative ideas, mandates that cryptocurrency service providers safeguard users’ funds and deposits, carry insurance, save a percentage of reserves in offline cold wallets in case of breaches or system failures, and keep track of all transactions.

The law contains penalties for price manipulation, fraudulent cryptocurrency asset advertising, and failure to provide relevant investor information. For those found guilty, the minimum sentence is one year in jail, and the maximum fine is three to five times the profits generated by the offense.

The definition of « virtual assets » under the proposed legislation is an « electronic representation of an economic value that can be traded or transferred electronically. » The central bank digital currency (CBDC) managed by the Bank of Korea, the nation’s central bank, is not included in the law.

The Bank of Korea has argued with the nation’s financial regulators for the power to seek data from cryptocurrency platforms, which is now granted under the legislation. The cryptocurrency market requires control, according to the bank, since it might have a big influence on financial and monetary stability.

Hwang Suk-jin, a member of the ruling People Power Party’s Digital Asset Special Committee, claimed in an interview with Forkast in May that the proposed measure will provide legal rights for consumers of virtual assets and construct a safer and more dependable market for cryptocurrencies.

On the Global Crypto Adoption Index created by blockchain analytics company Chainalysis in 2020, South Korea was ranked 7th globally and has one of the most active cryptocurrency economies in the world.

The nation dropped to number 23 on the index in 2022, the same year that the Terra-Luna cryptocurrency and stablecoin that had been introduced in the nation and resulted in enormous losses for thousands of investors, collapsed for a reported $40 billion. Nevertheless, according to data from CoinMarketCap, the South Korean cryptocurrency exchange Upbit is still the third-largest in terms of trading volume worldwide.

The Terra-Luna fiasco pushed South Korean lawmakers to pass laws creating a regulatory framework for cryptocurrencies that prioritized investor protection first. Regulations for local businesses around token issuance and information disclosure are anticipated to be the main focus of the next phase of cryptocurrency legislation.

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