The Act on the Protection of Virtual Asset Users (Act No. 19563) (VAUPA), promulgated on July 18, 2023, came into force on July 19, 2024. According to a press release by the Financial Services Commission (FSC), the law is intended “to establish a sound order in the virtual asset market and ensure protection for users.” Cryptocurrency exchanges strengthened their compliance control systems to prepare for the law going into effect.
Main Features of the Act
There are four key aspects of the new law:
- What are “virtual assets” covered by the law
- Protection of users’ assets
- Regulation of unfair trade practices
- Supervision, sanctions, and penalties
Definition of “Virtual Assets”
The act defines “virtual assets” broadly as “electronic certificates (including all associated rights) that have economic value and that can be traded or transferred electronically,” but excludes certain assets, such as products regulated under other statutes, and digital currencies issued by the Bank of Korea. (VAUPA art. 2, para. 1.)
Regarding non-fungible tokens (NFTs), on June 10, 2024, the FSC and the Financial Supervisory Service of South Korea announced new guidelines to clarify the application of VAUPA to NFTs. As summarized by the FSC, the following cases are likely to be considered virtual assets under the law:
a) When identical or similar types of NFTs are being issued in large quantities or in a series. . . .
b) When it is possible to split an NFT . . . into factional units.
c) When it is possible to use an NFT as a direct or indirect method to pay for certain goods or services.
d) When it is possible to use an NFT as a means of exchange for virtual assets among unspecified individuals, or when it is possible to be used as a means for payment for goods or services linked to other types of virtual assets . . . .
Protection of Users’ Assets
The new law imposes responsibilities on virtual asset service providers (VASPs) to protect users’ deposits by managing separate accounts and a user list. (Arts. 6, 7.) VASPs are responsible to enroll in insurance or mutual aid programs in accordance with guidelines in the event of accidents such as hacking and computer failures. (Art. 8.) They must also retain virtual asset transaction records for 15 years from the time the relevant transactional relationship is terminated. (Art. 9.)
Regulation of Unfair Trade Practices
The new law prohibits the use of material nonpublic information (art.10, para. 1), market price manipulation (art. 10, paras. 2, 3), and acts of unfair trading that would disturb market order (art. 10, para. 4). These provisions are similar to parallel provisions in the Financial Investment Services and Capital Markets Act (Act No. 19263). In addition, the new law prohibits discretionary blocking of deposits or withdrawals of virtual assets (art. 11), and will require crypto exchanges to create mechanisms to monitor and report suspicious activities to financial authorities (art. 12).
Supervision, Sanctions, and Penalties
The FSC may supervise VASPs’ acts and inspect their business affairs and financial status. (Art. 13.) The new law has provisions for investigation of and measures in response to unfair trade practices (art. 14) and measures against violators (art. 15). Available enforcement mechanisms include penalties for unfair trade practices (art. 17), entrustment of supervisory authority (art. 18), general penalty provisions (art. 19), confiscation and collection (art. 20), joint penalty provisions (art. 21), and administrative fines (art. 22). The law provides for a one-year minimum sentence of imprisonment, and no maximum sentence, for specified violations of the law. (Art. 19 (1).)
Prepared by Inseol Hong, Foreign Law Intern, under the supervision of Sayuri Umeda, Foreign Law Specialist
Law Library of Congress, July 19, 2024
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