Rumors of "mass delisting of tokens" in South Korea are rampant. What impact will the upcoming "Virtual Asset User Protection Act" have?
Recently, South Korea's virtual asset regulatory agencies have frequently announced new regulatory developments, and there was even a reversal in the news. In fact, to align with the "Virtual Asset User Protection Act" that took effect on July 19, South Korea's cryptocurrency-related regulatory agencies and self-regulatory organizations are actively "taking action."Author: Weilin, PANews
Recently, South Korea's virtual asset regulatory agencies have frequently announced new regulatory developments, and there was even a "reversal" in the news. Initially, there were online rumors claiming that regulatory agencies "notified nearly 30 registered exchanges to review over 600 cryptocurrencies listed," and "16 tokens will be delisted." This led to panic in the market over a large-scale delisting of tokens, causing significant price drops for the related tokens.
On June 18, the Financial Services Commission (FSC) of South Korea clarified that it would not directly participate in the inspection of cryptocurrencies listed on Korean exchanges, and that it was actually an industry self-inspection. In fact, to comply with the "Virtual Asset User Protection Act" effective July 19, South Korea's cryptocurrency regulatory agencies and self-regulatory organizations are proactively "taking action."
Regulatory Agencies Establish "Suspicious" Activity Monitoring System, Reviewing 1,333 Virtual Assets Over 6 Months
The latest news is that on July 4, the Financial Supervisory Service (FSS) of South Korea stated in a declaration that it is establishing a 24-hour monitoring system to monitor abnormal cryptocurrency trading activities and suggested that exchanges input data and information into this system to ensure compliance with the "Virtual Asset User Protection Act" effective July 19. The statement pointed out that danger signals include trading volumes and prices exceeding normal ranges, excessive trading volumes, and abnormally slow execution speeds. The Financial Supervisory Service stated that one of the goals of this measure is to identify accounts associated with "suspicious" activities.
This statement is one of a series of recent regulatory developments in South Korea. In mid-June, a list of "Korean won market tokens that may be delisted in June" circulated among major virtual currency communities and social media in South Korea, involving 16 tokens, which caused prices of about half of the listed tokens in the won market to plummet. Meanwhile, there were reports that regulatory agencies notified nearly 30 registered exchanges to review over 600 cryptocurrencies.
On June 18, rumors circulated on South Korean social media that regulatory agencies notified exchanges to "review over 600 cryptocurrencies," leading to a sharp price drop for a batch of listed tokens on Upbit, the largest cryptocurrency exchange by trading volume in South Korea.
However, on June 18, the Financial Services Commission (FSC) clarified that it would not directly participate in the inspection of cryptocurrencies listed on Korean exchanges.
Shortly after, on July 2, the alliance DAXA, composed of South Korea's five major cryptocurrency exchanges, announced the launch of a six-month reassessment plan for 1,333 digital assets. DAXA stated that to align with the implementation of the "Virtual Asset User Protection Act," it has developed a "Self-Regulatory Management for Virtual Asset Trading Support," which will be officially implemented alongside the "Virtual Asset User Protection Act" on the 19th of this month in domestic exchanges. For over 1,333 virtual assets, exchanges will conduct a reassessment of virtual assets over the six months starting from the implementation date. This self-regulatory management was developed based on the requirements of regulatory authorities such as the Financial Services Commission and the Financial Supervisory Service, and expert opinions were collected.
Under the influence of this reassessment plan, 29 cryptocurrency trading platforms, including Upbit, Gopax, and Bithumb, will evaluate whether their listed tokens meet the new regulatory requirements, which will also serve as a benchmark for future token listings.
In addition, for overseas virtual assets, the alliance plans to implement a more flexible "substitute review scheme," which will relax some review conditions if the overseas virtual assets have been traded in qualified markets for more than two years. DAXA is currently identifying eligible foreign exchanges, including those recognized by the International Organization of Securities Commissions (IOSCO).
The "Virtual Asset User Protection Act" in South Korea Will Take Effect
The "Virtual Asset User Protection Act," which will take effect on July 19, aims to protect virtual asset users and establish a healthy market order. The act defines virtual assets and specifies exclusions, and it stipulates the obligations of virtual asset operators to safely store and manage user deposits and virtual assets.
Specific contents include: increasing the exclusions for virtual assets (the "CBDC" issued by the Bank of Korea is not included in the scope of virtual assets); requiring virtual asset business operators to separate user deposits from their own assets and deposit or entrust them to management institutions, such as banks; requiring virtual asset operators to keep over 80% of user deposits in cold wallets to protect user funds and participate in insurance plans to potentially compensate users in case of security breaches. Additionally, the use of undisclosed significant information, market price manipulation, and fraudulent trading behaviors are defined as unfair trading practices in box trading, and violators will be liable for damages and may be fined; arbitrary blocking of user access to virtual assets is prohibited, and virtual currency exchange operators are required to monitor abnormal trading in the virtual asset market at all times, take appropriate measures, and notify financial authorities, among other stipulations.
For users, the strongest protection is that in cases of bankruptcy of virtual asset enterprises or cancellation of business registration, the managing institution, the bank, will announce the time and place for deposit payments in newspapers and websites, receive user deposit data, and directly pay deposits to users after confirmation by the virtual asset operator.
Based on these contents, the act clarifies the establishment of a Virtual Asset Committee. On June 18, the proposal to establish the Virtual Asset Committee by the Financial Services Commission of South Korea was approved at a state council meeting. With formal organization, 12 employees will be converted to full-time positions, and a new fifth-level public servant responsible for artificial intelligence in the financial sector will be added. The Asset Committee will temporarily operate, responsible for establishing management and supervision work for virtual asset market order and user protection. At the same time, the Virtual Asset Committee also plans to actively address unfair trading in virtual assets, imposing fines, criminal prosecutions, and other sanctions.
From the background of the "Virtual Asset User Protection Act," South Korea already had the "Amendment to the Specific Financial Information Protection Act" in 2021, which introduced a review system for virtual asset practitioners from an anti-money laundering perspective. However, in terms of user protection, lawmakers believe that there is still room for improvement in this law, so discussions on virtual asset legislation have been very active, centered around members of the National Assembly. In April 2023, lawmakers reached an agreement to formulate the "Virtual Asset User Protection Act," focusing on the most urgent user protection. Subsequently, both parties gradually and progressively reached an agreement on legislative matters.
The Korean Won Became the Most Active Cryptocurrency Trading Currency Globally in Q1, Opinions on Market Impact of New Legislation Vary
The importance of the South Korean cryptocurrency market is increasing day by day. In the first quarter of 2024, the Korean won was the most active currency for trading cryptocurrency assets globally, surpassing the US dollar. Data from research firm Kaiko shows that in Q1 2024, the cumulative trading volume of the won on centralized cryptocurrency exchanges was $456 billion, while the trading volume of the US dollar was $445 billion.
The growth of won-denominated trading is partly a result of ongoing fee wars among South Korean exchanges. Smaller exchanges like Bithumb and Korbit have recently launched zero-fee trading promotions in an attempt to attract traders from Upbit, which dominates the local market with over 80% market share in spot trading volume.
In South Korea, users tend to trade smaller, more volatile altcoins rather than more mainstream cryptocurrencies like Bitcoin and Ethereum. On average, trades involving smaller market cap tokens account for over 80% of all activities in South Korea.
Meanwhile, cryptocurrency activities are attracting more attention from young people in South Korea. A recent survey showed that an increasing number of young South Koreans view cryptocurrencies and stocks as alternative investment options for retirement, with over half of respondents aged 20 to 39 expressing distrust in the national pension system. Notably, about 7% of election candidates disclosed digital assets in their asset declarations.
Now, the new legislation marks a new phase in the regulation of virtual assets in South Korea. Regarding the new legislation, Matt Younghoon Mok, a senior lawyer and partner at Lee&Ko Seoul law firm, stated that the guidelines from the Financial Supervisory Service may pose significant challenges for altcoins that cannot quickly meet regulatory requirements.
However, the aforementioned alliance of five major exchanges, DAXA, explained, "Major exchanges have already adopted key review items in advance, and the reassessment based on the new self-regulatory standards will be conducted in phases over six months, so a one-time large-scale delisting is unlikely to occur."
At the same time, industry insiders in South Korea hold an optimistic view that the implementation of the "Virtual Asset User Protection Act" may enhance the competitiveness of the domestic virtual asset market. Researcher Yoon Chang-pae from the Upbit Investor Protection Center stated, "The impact of regulatory measures must be viewed from a long-term perspective. In the short term, an increase in liquidity may not be seen." He added, "The core of the 'Virtual Asset User Protection Act' is to enhance market stability, focusing on protecting virtual asset investors, expanding market stability, which may promote business expansion and innovation in the future."
Former head of the Eastern District Prosecutor's Office in Seoul, Kim Myung-yoon, analyzed that with the exponential growth of cryptocurrency trading, various side effects and related crimes are also increasing. For example, cases of price manipulation of virtual assets worth 90 billion won, unreported illegal virtual asset exchange operations worth 580 billion won, and deposit cases of 1.4 trillion won involving Haru Invest. In handling the above cases, the main provisions of the Criminal Law regarding fraud or violations of the amended Specific Financial Information Protection Act are applied for conviction, but existing laws struggle to comprehensively cover the trading relationships in this special field of virtual assets, leading to some shortcomings in addressing issues. Due to this specificity, proving the existence of criminal suspicions related to virtual asset trading, such as fraud, and the causal relationship between errors and disposal actions requires more effort and time from investigative authorities than in other cases.
"Some believe that the implementation of the new law will lead to a shrinkage of virtual asset trading, such as prohibiting 'market making,' cold wallets (offline wallets isolated from the internet), real-time monitoring of suspicious transactions, and reporting to financial authorities. However, I believe that through the implementation of the new law, virtual asset trading will become fairer and more transparent, preventing specific forces from monopolizing benefits due to speculative trading, which will instead make the virtual asset trading field more active."
