The “Virtual Asset User Protection Bill” consolidates and reconciles 19 legislative proposals introduced over the two years since May 2021.
South Korea’s new legislation for the crypto sector passed a key legislative review subcommittee of the National Assembly’s National Policy Committee on Tuesday (25 April), clearing a hurdle for its potential adoption later this year.
The Virtual Asset User Protection Bill, which consolidates and reconciles 19 legislative proposals introduced over the two years since May 2021, aims to establish virtual asset user protections and fair and transparent market practices.
It also resolves terminology — selecting the term “virtual asset” from among other proposed terms such as “crypto asset” or “digital asset,” and defining “virtual asset” to be an electronic representation of economic value that can be transacted and transmitted electronically (inclusive of all rights thereto).
The bill further excludes a number of categories from falling under the definition of “virtual asset.” Most notable among these is “electronic currency or associated service issued by the Bank of Korea” (i.e. CBDC).
Also excluded are:
- electronic certificates – or the information related to those certificates – that cannot be exchanged for money, goods, or services, and for which the issuer has restricted the user and usage
- the tangible and intangible results obtained through the use of game products as per the Game Industry Promotion Act
- “prepaid electronic payment means” and “electronic currency” as defined under the Electronic Financial Transactions Act
- stocks registered under the Act on Electronically Registered Stocks, Bonds, Etc.
- electronic promissory notes, as defined under the Issuance and Distribution of Electronic Notes Act
- electronic bills of landing, as per the Commercial Act
- things which, due to the form or unique nature of their transaction, are exempted by the bill’s issuing decree
Other definitions include those for “virtual asset services provider”, “[virtual asset] user”, and “virtual asset market”.
The virtual asset user protection measures contained in the bill include:
- requiring that customer deposits be placed into segregated deposit and/or trust accounts
- requiring that detailed records pertaining to customer virtual assets be maintained and that customer virtual assets be stored in the same asset and same amount in which they were entrusted
- requiring cold wallet storage of customer assets in excess of the ratio specified by the Banking Act and its implementing decrees
- requiring that proactive measures (insurance, deduction subscriptions, and/or the accumulation of reserves) be taken to prepare against hacking, system failure, etc.
- requiring the generation and retention (for 15 years following the conclusion of a given transaction) of records pertaining to transactions
The fair and transparent market practices measures include:
- prohibiting the use (including making available for use by others) of material nonpublic information in trading or transacting in virtual assets among defined categories of market participants
- prohibiting a range of defined categories of market manipulating, unfair, or otherwise fraudulent activities (including incomplete or misleading disclosures)
- restricting trading or transacting in self-issued virtual assets by VASPs or those in special relationships with VASPs (as defined by law) outside of predefined processes
- assigning criminal and civil liability for violations of these rules, and allowing both class-action litigation and the imposition of fines by the Financial Services Commission (FSC) related to losses suffered by users in conjunction with such violations
- prohibiting the suspension of user virtual asset deposits or withdrawals without appropriate justification, advance notice to users, and immediate reporting to the FSC
- requiring VASPs to monitor continuously for irregular transactions in compliance with FSC guidelines, and to report suspected violations to the FSC, Financial Supervisory Service (FSS), or investigatory organs (e.g. police, prosecutors)
Finally, the bill establishes jurisdiction over different aspects of the virtual asset industry, using language that echoes the Financial Investment Services and Capital Markets Act.
- The bill gives the FSC authority over the supervision and inspection of VASPs — including the ability to demand that VASPs submit a report on operations or property, submit relevant materials, make available witnesses for testimony, and give testimony or state an opinion. The FSC may determine the methods and procedures for inspection, the standards for measures for the results of inspection, and other matters related to inspection operations.
- It gives the FSC authority over the examination into unfair trading practices and those suspected of involvement in such practices. This includes the ability to demand the submission of a report or materials for reference, appearance to make a statement on the matters under investigation, or the submission of account books, documents, and other materials necessary for the investigation.
- Here, the FSC can delegate: it can require the Governor of the FSS to examine account books, documents and other materials, but the FSS Governor must report the results back to the FSC. Yet more broadly, the FSC is allowed to delegate “all or part of its tasks under this law to the Governor of the FSS, in accordance with the implementing decree”
- The bill also gives the FSC the ability, if deemed necessary to investigate violations, to take provisional custody of account books, documents, and other materials, and to inspect the operations, account books, and other materials therein through entering an office or a place of business of any related person.
- The FSC can, in accordance with the procedure detailed in the act’s implementing decree, make public the findings of and measures taken as a result of the examination in order to discourage or prevent future violations.
- The bill provides the FSC the ability to take measures against VASPs analogous to those in the Financial Investment Services and Capital Markets Act, and lays out a formula by which the FSC is to determine, adjust, and impose penalties.
- The FSC can also request that the Prosecutor General, to the extent deemed necessary, provide investigation related material to the FSC for the purposes of determining a penalty.
- The FSC can, in accordance with the terms to be set out in the implementing decree, establish and operate a Virtual Assets Committee for the purpose of consultation on matters pertaining to the virtual assets market and VASPs.
- The bill gives the Bank of Korea (BOK) the ability to demand the submission of materials from VASPs when the Monetary Policy Committee deems it necessary for the implementation of monetary and credit policies, financial stability, and the smooth operation of payment and settlement systems. In these cases, however, the requested materials must be limited to the minimum necessary in scope in consideration of the operational burden on the VASPs.
The subcommittee made a number of compromises in order to move the bill through. These are reflected both in the text of the reconciled bill and in the subcommittee’s procedural decisions. Particularly of note here was the subcommittee’s:
- decision to split its virtual assets lawmaking into “two stages”: this first aimed at establishing basic user and market protections and jurisdiction, the second — to come — focused on technical problems including the listing and issuance of virtual assets;
- adopt an ancillary opinion — a unique measure that is, on its surface, a non-binding expression of alternate views, but that in practice has proved to have more complex implications for pending legislation — highlighting a number of fault lines, issues yet to be resolved, future challenges, and possible outcomes for this legislation.
The Ancillary Opinion charges the FSC with :
- evaluating, analysing and devising measures to address conflict of interest issues arising in the process of VASPs’ issuance and distribution of virtual assets and in establishing and operating the virtual assets market
- establishing a regulatory framework for stablecoins, security tokens, and utility tokens; preparing a regulatory framework for virtual asset analysis, advisory, and disclosure services; creating plans for a comprehensive electronic data system that can provide information on digital assets in a reliable and reasonable manner (e.g. market prices, disclosures)
- preparing policies to improve the regulation of VASPs’ business operations
- (together with KoFIU) reviewing whether the real-name verification system for account users is in line with the original intent of preventing money laundering, and reasonable; and considering improvement measures if needed
- (together with the FSS) supporting virtual asset exchanges in establishing common standards for the circulation and issuance of virtual assets
- determining the restrictions on trading or transacting in self-issued virtual assets by VASPs or those in special relationships with VASPs, to impose transparent disclosure and strict internal control obligations on VASPs and ensure the protection of virtual asset users, while also ensuring the expansion of virtual asset usability or the emergence of innovative services that integrate with the real economy are not hindered
- delegating its authority to investigate VASPs to the FSS in order to ensure the effective enforcement of the law on protecting virtual asset users and prohibiting unfair trading practices
- supporting the establishment of internal controls and transparent procedures related to the handling of new virtual assets common to virtual asset exchanges through virtual asset-related self-regulatory organisations and other entities
The Virtual Asset User Protection Bill will still need to go through additional reviews and a series of other steps before it is submitted to plenary session of the National Assembly for final approval.