New South Korea Rule Ensures Customer Refunds in Crypto Exchange Bankruptcies

Crypto investors in South Korea will have more peace of mind starting next month, thanks to new rules that protect users’ balances in case of a crypto exchange bankruptcy.
The Financial Services Commission (FSC) on Tuesday announced that the government approved an enforcement decree aiming to boost confidence in the country’s digital asset market.
The recently passed virtual asset proposals offer more than just safety nets for user balances during exchange failures. They represent a wider effort to regulate the crypto space in South Korea. Effective July 19, these measures will clearly define and categorize virtual assets. They will also establish mechanisms to tackle unfair trading practices.
[Press Release] The Financial Services Commission announced that the government approved a new legislative bill on the Enforcement Decree of the Act on the Protection of Virtual Asset Users at a cabinet meeting held on June 25. https://t.co/gwFozngToP
— Financial Services Commission – FSC Korea (@FSC_Korea) June 25, 2024
New South Korea Rules Shield Crypto User Deposits
Under the decree, VASPs (Virtual Asset Service Providers) will be required to hold customer deposits at reputable financial institutions, separate from their own company funds. This move aims to minimize risks associated with exchange insolvency and enhance user trust in the Korean crypto market.
If a VASP faces bankruptcy or closure, the custodian bank will step in. It will have to directly return user deposits to customers after publicly announcing the process through newspapers and websites.
Focus on Offline Storage of User Assets
VASPs will now be required to store at least 80% of their users’ digital assets in cold storage. Cold storage refers to offline, high-security systems that minimize the risk of hacking or loss.
Additionally, the authorities can mandate an even stricter cold storage ratio for a specific VASP if there are concerns about security breaches, fraudulent activity, or potential business closure.
New Korean Law Means Tough Penalties for Fraud
The decree also cracks down on manipulative activities in the crypto market, with serious consequences for those caught cheating. Abusing the system to make money unfairly can now lead to criminal charges and hefty fines. Criminals could face at least a year behind bars, or be fined up to five times the amount of their ill-gotten gains.
This month, a court upheld a 10-year prison sentence for a South Korean crypto fraudster Wi, who exploited hundreds of investors out of $82.6m. Wi’s scheme involved luring victims with the promise of “guaranteed” returns, a tactic that ultimately landed him in hot water.
The new rules also grant VASPs the authority to restrict user deposits and withdrawals under specific circumstances.
Millions Seized in Recent Crackdowns
While South Korea has yet to officially tax crypto profits, the government’s back-and-forth on introducing levies has created uncertainty. Tax authorities, however, remain vigilant, suspecting many are using crypto as a tool to conceal income.
Just this month, a province seized roughly $138,000 worth of cryptocurrency from 31 suspected tax evaders. In March, tax authorities in Hwaseong seized crypto assets valued at more than $768,500.
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