The Foundation aims to "protect the rights and interests of virtual asset users and establish a sound order in market transactions". It will receive users’ assets transferred out from closed down exchange service providers after a having consultation process, and safely keep and manage these assets, and ultimately return them to their owners.

The Act contains provisions "(a) protecting users’ deposits and virtual assets, (b) regulating unfair trading activities, such as price manipulation, (c) authorizing the financial regulators to supervise, inspect, and sanction VASPs, and to investigate and take appropriate actions against those engaging in unfair trading activities."

Pursuant to the Act on the Protection of Virtual Asset Users, which is scheduled to go into effect from 19 July 2024, unfair trading activities involving virtual assets, such as the use of material non-public information, price manipulation, and other fraudulent activities, are prohibited and subject to criminal punishment or penalty surcharge.

Once the Act becomes effective, unfair trading activities (or suspicious transactions) involving virtual assets will be first (i) monitored by virtual asset service providers, then the case will be (ii) examined by the Financial Services Commission and the Financial Supervisory Service to bring a formal charge with the prosecutors’ office, which will then (iii) investigate the case for (iv) imposing a criminal punishment or penalty surcharge.

The regulator issued a preliminary notice for the new operating rules for public comment from 28 March to 7 May 2024.

The newly established law is aimed at "guaranteeing protection of assets held by virtual asset users, regulating unfair transaction activities in the virtual asset market and conferring the market oversight and sanctions authority to the FSC."

Under the Act, virtual asset service providers (VASPs) are required to "(a) manage their customers’ virtual asset transaction deposits separately from their own assets, (b) keep virtual assets owned by their customers separately from the virtual assets in their possession, (c) actually hold the types and quantities of virtual assets entrusted by the users of virtual assets while maintaining a certain proportion of virtual assets (to be determined by a presidential decree) in cold wallet storage, (d) have an insurance plan or set aside reserves to comply with the responsibility in the event of computer hacking or network crash, and (e) maintain records of virtual asset transactions for fifteen years to enable tracking and verification of transaction history."

Regarding the regulations on unfair transaction activities, the Act "prohibits improper use of undisclosed material information, manipulation of market prices and fraudulent transaction activities (false reporting, intentional omission, etc.) while restricting VASPs from transacting self-issued virtual assets."

In addition, VASPs are required to regularly monitor "abnormal activities" such as transactions involving "extreme volatility in prices and volumes" and take appropriate measures to ensure user protections. VASPs must immediately report suspicious activity to the financial and investigative authorities.

The Act also establishes a "clear legal foundation conferring the supervisory and sanctions authority to the FSC." In particular, unfair transaction activities are subject to "minimum imprisonment of one year or a fine of at least three times and up to five times of unfairly gained profits. Gains from unfair transaction activities will be confiscated, and when unable to do so, authorities will pursue collection of an equivalent amount."

The newly enacted law is expected to go into effect in July 2024, one year after promulgation

According to a statement, the Korea Financial Intelligence Unit and the Financial Supervisory Service are looking at whether the banks are complying with anti-money laundering obligations and customers' identification measures.

"The inspectors will look into whether the banks comply with their anti-money laundering obligations in their transactions with cryptocurrency exchanges; and whether they have in place appropriate measures to verify their customers' identification in regard with cryptocurrency trading.," the statement reads.

The statement lists some of elements the regulators will investigate, including whether the banks have internal controls in place with regard to money laundering risks by cryptocurrency exchanges, whether they have electronic systems to match deposit holders' names with virtual account holders and whether they can stop transactions if the exchanges refuse to provide customers' information.

The statement also notes that the South Korean government is monitoring developments in the cryptocurrency field and will not hesitate to take action when necessary.

"The government continues to review all possible options including shutdown of cryptocurrency exchanges in order to minimize side effects of cryptocurrency trading – fraud using cryptocurrencies, cyber hacks on cryptocurrency exchanges, and irrationally overheated speculation."

The FSC also announced curbs to margin trading in the cryptocurrency platforms, where people are allowed to trade digital coins using borrowed money.

These actions show South Korea financial regulators' determination to tightly control and monitor the trading of virtual currencies.

Caution required

The rapid advances made with blockchain technology have caught many unawares.

The ability to create new, decentralized business models utilizing blockchain technology has generated tremendous excitement among start-up entrepreneurs and existing businesses.

At the same time, the ability to raise significant amounts of funds with little or no regulatory oversight has also attracted the inevitable scammers and fraudsters.

In addition, many token purchasers are mis-educated and confuse cryptographic tokens with purchasing shares in a more traditional company.

Waves of speculation have also given rise to huge movements in the price of those tokens trading in a secondary market.

Regulatory concerns

Despite these factors, over $2bn has been raised to date using ICOs, making it one of the hottest methods of fundraising globally in 2017.

This has raised serious investor protection concerns among worldwide regulators.

Regulators from the US, Canada, Singapore, UK, Hong Kong and China have recently issued reminders to the market about the existing regulations that apply to offerings of securities (in whatever form they take), while also strengthening their warnings to investors about disreputable companies using purported ICOs to defraud investors.

However, unlike China and South Korea's outright ban on ICOs, other regulators have taken a more moderate approach.

The regulators from the US, Canada, Singapore, the UK, Hong Kong stated that if the digital tokens being offered qualified as securities, Regulators should follow the various procedures stipulated by the relevant securities regulations, such as register offers and sales of such securities unless a valid exemption applies.

In determining whether a particular investment transaction involves the offer and sale of a security will depend on the facts and circumstances, including the economic realities of each transaction.

In addition, last month, the US Securities and Exchange Commission filed a complaint against a number of legal entities and an individual named Maksim Zaslavskiy regarding fraudulent activity relating to two ICOs purportedly backed by real estate and diamonds.