South Korea’s Financial Services Commission (FSC) has recently announced, in 2023, the passage of the Act on the Protection of Virtual Asset Users (referred to as “the Act”) in the National Assembly’s latest plenary session.
This law focuses on safeguarding the assets of virtual asset users, outlining unfair practices in the virtual asset market, and granting the FSC comprehensive oversight and punitive powers.
Since March 2021, Virtual Asset Service Providers (VASPs) have been governed by the revised Act on Reporting and Using Specified Financial Transaction Information . VASPs are entities involving cryptocurrency exchanges, wallet providers, and various platforms specializing in digital asset services, including transactions and storage.
This regulatory framework aims to oversee and standardize the operations of VASPs in the digital asset domain. However, this framework’s limitations in addressing unfair transaction activities and protecting users led to a call for more robust regulations.
In response, the government formed a joint public-private task force in August 2022 to develop a more robust regulatory framework, focusing on phased regulation, consistency, and global standards alignment.
This initiative culminated in the National Policy Committee’s legislative subcommittee enacting essential measures on April 25, 2023, leading to the passage of a comprehensive legislative bill on June 30, 2023, integrating nineteen pending bills to enhance the supervision and protection of virtual asset users.
Recognizing the risks yet understanding the potential of cryptocurrencies, the South Korean government has begun to regulate the market.
First, it introduced Anti-Money Laundering (AML) and securities regulations enforced by the Financial Services Commission (FSC). The government’s approach evolved from observation to active rule, reflecting a paradigm shift in policy toward digital assets.
Yes, it is possible to buy cryptocurrencies in South Korea. The current regulatory framework is characterized by stringent measures aimed at investor protection and market stability.
Cryptocurrency exchanges are required to register with the FSC and adhere to strict AML guidelines. The Electronic Financial Transactions Act and the Act on Reporting and Use of Specific Financial Information form the backbone of these regulations, defining cryptocurrencies as “electronic assets” and outlining rules for their use.
The Act introduces significant measures to regulate and safeguard the virtual asset sector, focusing on three key areas:
The Act sets forth User Asset Protection Rules for VASPs, which include several key measures. Firstly, it requires the separation of customer transaction deposits from VASP assets, ensuring distinct storage of customers’ virtual assets. VASPs are also mandated to hold the types and quantities of virtual assets entrusted by users, with a significant portion in cold wallet storage, the details of which will be specified in a presidential decree.
Additionally, VASPs must have insurance or reserves for scenarios like hacking or network failures and are required to maintain transaction records for fifteen years for tracking and verification purposes.
The second major aspect of the Act involves Regulations on Unfair Transaction Activities. This includes a prohibition on the use of undisclosed material information, manipulation of market prices, and engagement in fraudulent activities such as false reporting.
VASPs are also restricted from trading self-issued virtual assets and are obligated to monitor and respond to abnormal activities, like transactions with extreme price or volume volatility. Furthermore, there is a mandatory requirement for VASPs to report suspicious transactions to financial and investigative authorities.
Finally, the Act grants Supervisory and Sanctions Authority to the FSC. Under this provision, unfair transaction activities are subject to stringent penalties, including a minimum of one year of imprisonment or fines ranging from three to five times the amount of illicitly gained profits.
Additionally, the Act allows for the confiscation of gains from unfair activities, or in cases where direct confiscation is not feasible, the collection of an equivalent amount.
Yes, cryptocurrencies are legal in South Korea and are regulated under precise AML and securities regulations. However, cryptocurrencies are not considered legal tender in South Korea.
The legal framework is complex but fundamentally aims to ensure the safe operation of the cryptocurrency market. Cryptocurrencies like Bitcoin are subject to these regulations, reflecting the government’s cautious yet supportive stance on digital assets.
Cryptocurrency exchanges in South Korea operate under guidelines that, while not laws, are crucial for understanding market regulation. These guidelines include licensing requirements for VASPs, which cover a broad range of services related to virtual assets. Exchanges must comply with these regulations to operate legally in South Korea.
Do Kwon and five associates linked to Terraform face allegations of fraud and the collapse of its digital currencies in May 2022. The US federal indictment has leveled eight charges against the 31-year-old, including securities fraud, commodities fraud, and wire fraud.
Kwon’s TerraUSD, envisioned as a stablecoin pegged to assets like the US dollar to maintain price stability, experienced a significant drop, wiping out around $40 billion in market value for holders of TerraUSD and its related currency, Luna. The US SEC accuses Kwon of orchestrating a multi-billion-dollar crypto asset securities fraud.
The taxation of cryptocurrencies in South Korea is a rapidly evolving area. Cryptocurrencies held as investments may be subject to capital gains tax, while those used as a means of payment could be liable for value-added tax (VAT). The government continues to revise its tax policies in response to the changing landscape of cryptocurrency usage.
President Yoon Suk-yeol has deferred taxation on crypto investment gains until the enactment of the Digital Asset Basic Act. This act is expected to impose a 20% tax on crypto gains above a certain threshold, reflecting the government’s effort to create a fair and transparent taxation system for digital assets.
Recent legislative and financial developments are shaping the future of digital assets in South Korea. This evolution, marked by significant steps toward integrating blockchain technology into the financial sector to address regulation and market stability challenges, is seen as a net benefit and positive toward onboarding more investors into a safe space to invest in the crypto market.
A significant development for the crypto industry is South Korea passing the “Digital Asset Basic Act” (DABA), as reported in the Polymesh report titled “Regulatory Developments in Digital Assets.”
This Act, comprising 17 legislative proposals, is designed to balance blockchain development and investor protection. Set for implementation in June 2024, DABA includes critical measures like capital reserve requirements for exchanges and creating a separate market for digital securities.
Shinhan Bank, South Korea’s oldest bank, has taken a notable step by becoming an equity investor in the Korea Digital Asset Custody Co. (KDAC) . This consortium is pivotal in providing digital asset custody solutions.
The journey toward digital asset regulation in South Korea has faced hurdles. A notable conflict has arisen between the FSC and the Bank of Korea (BoK) over who should hold regulatory supremacy over digital assets. The BoK has been assertive in demanding access to data from digital asset service providers, citing potential threats to financial stability.
South Korea’s journey in cryptocurrency regulation is a testament to the dynamic and complex nature of this emerging financial sector.
The country’s approach, characterized by a cautious yet supportive stance, offers valuable insights into how regulatory frameworks can evolve to support the growth of the cryptocurrency market while ensuring investor protection and financial stability.
As the digital currency landscape continues to evolve, South Korea’s regulatory policies will undoubtedly play a significant role in shaping the future of this dynamic industry.
What is the Digital Asset Basic Act (DABA) in South Korea?
The Digital Asset Basic Act (DABA) in South Korea, set for implementation in June 2024, includes 17 legislative proposals focusing on balancing blockchain development with investor protection, including capital reserve requirements for exchanges.
What are the tax implications for cryptocurrency users in South Korea?
In South Korea, cryptocurrencies held as investments may face capital gains tax, while those used for payments could incur VAT. The government is actively revising tax policies to adapt to the evolving cryptocurrency usage.
How is South Korea’s approach to cryptocurrency regulation evolving?
South Korea’s approach to cryptocurrency regulation is evolving from observation to active regulation, with stringent measures for investor protection and market stability, reflecting a shift in policy towards digital assets
How is Shinhan Bank involved in South Korea’s digital asset market?
Shinhan Bank, South Korea’s oldest bank, has become an equity investor in the Korea Digital Asset Custody Co. (KDAC), indicating its significant role in providing digital asset custody solutions amid regulatory challenges.