The Bill for Protection of Virtual Asset Users (the “Bill”) passed the plenary session of the National Assembly on June 30, 2023, and is expected to be enforced from the day one year has passed since its promulgation.
The Bill consolidates and amends 19 bills that were previously proposed in the National Assembly on virtual assets. In the absence of an internationally agreed-upon regulatory framework for virtual asset markets, the Bill aims to proactively introduce regulations that safeguard users’ assets and prevent unfair trade practices.
The key details of the Bill are as follows.
1. Scope
- The terms “virtual assets” and “virtual asset service providers” (“VASPs”), as used in the Bill, carry the same meaning as defined in the Act on Reporting and Using Specified Financial Transaction Information (the “AML Act”). However, the definition of “virtual assets” presented in the Bill excludes digital currencies issued by the Bank of Korea, commonly known as Central Bank Digital Currencies (“CBDCs”). The AML Act will be amended in accordance with the addendum of the Bill so that the definitions of “virtual assets” and VASPs under the AML Act follow the definitions under the Bill.
2. Protection of Users’ Assets
- (Protection of Deposits) VASPs are obligated to segregate users’ deposited assets from their own assets by depositing or entrusting them to a custodian such as a bank. These deposited or entrusted funds are protected and cannot be seized or set-off, ensuring that users receive priority payments in the event of the bankruptcy of the VASP or other similar situations.
- (Safekeeping of Virtual Assets) VASPs must segregate their virtual assets from users’ virtual assets and are obligated to ensure that they in effect hold the types and quantities of virtual assets entrusted by users. Furthermore, they must also keep at least a certain portion of virtual assets offline (i.e., not accessible via the Internet) and stored securely.
- (Subscription to Insurances) VASPs must take necessary measures to be able to fulfill their liabilities/obligations in the event of setbacks caused by hacking and computer failures. These measures may include subscribing to insurances or mutual aid programs and accumulating reserves.
- (Maintenance of Transaction Records) VASPs are required to maintain records of their virtual asset transactions for 15 years following the termination of the corresponding transactional relationship.
3. Regulation of Unfair Trade Practices
- (Prohibition of Use of Non-public Information) (i) VASPs, (ii) virtual asset issuers and their respective officers/employees/agents who obtain material non-public information in the course of performing their duties, (iii) major shareholders who obtain material non-public information while exercising their shareholder rights, and (iv) any other person who obtains material non-public information from any of the aforementioned persons, shall refrain from using, or enabling others to use such information to trade the virtual assets to which the information pertains.
- (Prohibition of Market Manipulation) The Bill prohibits any person from (i) conspiring with the seller/buyer of any virtual asset trading in advance of such trading or engaging in false trading, with an intent to misguide others into believing that virtual asset trades are active or mislead them to make a wrong judgment or (ii) deceiving market participants into perceiving that virtual assets are actively traded or engaging in trading to change or fix market price of virtual assets, with an intent to encourage the trading of virtual assets.
- (Prohibition of Fraudulent Trade Practices) The Bill prohibits (i) employing improper means/schemes/tricks, (ii) making false statements or misrepresentations of material facts, or (iii) utilizing false market prices with an intent to encourage trading or other transactions of virtual assets, in connection with virtual asset trading are strictly prohibited.
- (Prohibition of Trading Virtual Assets Issued by VASPs or their Related Parties) Except in certain circumstances, VASPs are prohibited from trading or engaging in other transactions involving virtual assets issued by themselves or their related parties.
- (Prohibition of Discretionary Blocking of Deposits or Withdrawals) VASPs are prohibited from arbitrarily blocking users’ deposits or withdrawals of virtual assets without a justifiable reason. In cases where blocking is necessary, VASPs must notify users in advance clarifying the reason and promptly report the blocking to the Financial Services Commission (the “FSC”).
- (Monitoring of Abnormal Transactions) VASPs that establish and operate virtual asset markets are responsible for continuously monitoring abnormal transactions, including those that cause unusual fluctuations in the price or trading volume of virtual assets. They must also respond appropriately to protect users and uphold the integrity of transactions.
4. Sanctions for Unfair Trade Practices
- (Criminal Punishments for Unfair Trade Practices) (i) Violations of the prohibitions of using non-public information, market manipulation or fraudulent trade practices may result in criminal punishments. In principle, offenders may face imprisonment for a minimum of one year or penalties amounting to three to five times the profit gained or loss avoided through the violation. (ii) Violations of the prohibitions of trading virtual assets issued by VASPs or their related parties may result in criminal punishments. Offenders may face imprisonment for a maximum of ten years or penalties amounting to three to five times the profit gained or loss avoided through the violation.
- (Administrative Fines for Unfair Trade Practices) For violations of the prohibitions of using non-public information, market manipulation, or fraudulent trade practices, the FSC has the authority to impose an administrative fine amounting to twice the profit gained or loss avoided through the violation.
The Bill primarily aims to safeguard users’ assets and prohibit unfair trade practices in the virtual asset industry. Specifically, like existing securities-related laws, the Bill strictly regulates unfair trade practices such as the use of non-public information, market manipulation, and fraudulent trade. These provisions address regulatory gaps and enhance the oversight of unfair trade practices related to virtual assets. As the Bill introduces substantial penalties, including criminal punishments and administrative fines, for such practices, it is expected to have a significant impact on the virtual asset industry. To ensure compliance, VASPs and other relevant stakeholders are advised to conduct thorough legal reviews in advance to avoid engaging in any unfair trade practices in the course of conducting their business. For relevant parties, it is also crucial to implement preventive measures, such as robust internal controls. Following the Bill’s enactment, discussions regarding broader legislation that covers additional aspects of the virtual asset industry, including virtual asset issuance, disclosure, and other sound market practices, are expected to take place.