On May 11, 2023, the National Policy Committee of the Korean National Assembly passed a bill known as the “2023 Proposal” on the Act on the Protection of Virtual Asset Investors (“Act”). The 2023 Proposal, which focuses on enhancing the protection of virtual asset investors, shall be finalized in the plenary session of the Korean National Assembly.
The 2023 Proposal introduces the following key points to enhance investor protection:
- It defines “Virtual Asset” as electronic certificates (including all rights thereto) that have economic value and can be traded or transferred electronically, excluding certain types of certificates.
- It defines “Virtual Asset Service Provider” (“VASP”) as an entity engaging in activities such as trading virtual assets, exchanging virtual assets, transferring virtual assets, and acting as a broker or intermediary.
- It imposes obligations on VASPs to protect investors, including depositing and managing investors’ deposits separately, segregating investors’ virtual assets from the VASP’s own assets, obtaining insurance for potential liabilities, retaining transaction records, and monitoring virtual asset prices and trading volume.
- It grants the Financial Services Commission’s (“FSC”) authority to supervise and inspect VASPs.
During the approval process, the Korean National Policy Committee also adopted views on the second phase of the Act, which will focus on market order regulations and the regulation of stable coins. The FSC will establish a regulatory framework for stable coins and promote research to assist in the implementation of the proposed regulations.
The 2023 Proposal also includes prohibitions on unfair trading practices, such as the use of material nonpublic information, market price manipulation, and unfair trading. VASPs are prohibited from trading virtual assets issued by themselves or affiliated persons and from blocking deposits and withdrawals without justifiable reasons.
Under the 2023 Proposal, the FSC has the authority to supervise and inspect VASPs, and can impose penalties and measures such as corrective orders, warnings, cautions, or business suspension. The FSC may delegate part of its authority to the Governor of the Korean Financial Supervisory Service (“FSS”).
The FSC may establish and operate a virtual asset committee to provide advice on policies and systems for VASPs. The composition and operation of the committee will be prescribed by a presidential decree.
VASPs in Korea should be aware that the Bank of Korea may request data for the implementation of monetary and credit policies, financial stability, and the operation of payment and settlement systems related to virtual asset transactions.
Under the 2023 Proposal, individuals who suffer damages from trading virtual assets or in the process of trading can initiate a class action and file a claim for damages. This is applicable to cases related to the use of material nonpublic information, market price manipulation, unfair trading, and trading of virtual assets issued by the VASP itself or affiliated persons.
Market participants are advised to continuously monitor this area and the progress of the second phase of the Act, as the 2023 Proposal may undergo modifications or supplements in the subsequent legislative process.
It is recommended for market participants to establish internal control systems and implement employee training programs before the legislation comes into effect to avoid administrative fines, penalties, and fines for non-compliance with the 2023 Proposal.
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