Rumors of “large-scale delisting of tokens” in South Korea continue
Recently, the regulatory agency for virtual assets in South Korea has frequently announced new regulatory measures, causing a “reversal” in sentiment. First, there were rumors on the internet that the regulatory agency had “notified nearly 30 registered exchanges to review over 600 cryptocurrencies listed on them” and that “16 tokens will be delisted.” This led to panic in the market and a significant drop in the prices of related tokens.
On June 18, the Financial Services Commission (FSC) of South Korea clarified that it would not directly participate in the inspection of cryptocurrencies listed on South Korean exchanges. It was actually a self-check by the industry. In fact, in order to comply with the Virtual Asset User Protection Act, which will take effect on July 19, regulatory agencies and self-regulatory organizations in South Korea’s cryptocurrency industry are actively taking action.
The regulatory agency is establishing a “suspicious” activity monitoring system, reviewing 1,333 virtual assets over a period of six months
The latest news is that on July 4, the Financial Supervisory Service (FSS) of South Korea stated in a statement that it is establishing a 24-hour monitoring system to monitor abnormal cryptocurrency trading activities and recommended exchanges to input data and information into the system to ensure compliance with the Virtual Asset User Protection Act, which will take effect on July 19.
The statement pointed out that danger signals include trading volume and prices exceeding normal ranges, excessively large trading volume, and unusually slow execution speeds. The Financial Supervisory Service stated that one of the objectives of this measure is to identify accounts associated with “suspicious” activities.
This statement is one of the recent series of regulatory measures in South Korea. In mid-June, a list of “Korean market tokens that may be delisted in June” circulated in major cryptocurrency communities and social media platforms, involving 16 tokens, causing a significant drop in the prices of about half of the listed tokens in the Korean market. At the same time, there were reports that the regulatory agency notified nearly 30 registered exchanges to review over 600 cryptocurrencies.
However, on June 18, the Financial Services Commission (FSC) of South Korea clarified that it would not directly participate in the inspection of cryptocurrencies listed on South Korean exchanges.
Soon after, on July 2, the DAXA alliance, composed of five major cryptocurrency exchanges in South Korea, announced the launch of a six-month reevaluation plan for 1,333 digital assets. DAXA stated that it has formulated the “Self-Regulation for Virtual Asset Trading Support” to comply with the implementation of the Virtual Asset User Protection Act, which will be officially implemented in domestic exchanges on July 19. Exchanges will conduct reevaluations of the 1,333 virtual assets starting from the implementation date for a period of six months. The formulation of this self-regulation was based on the requirements of the Financial Commission and the Financial Supervisory Service, and collected expert opinions.
Under the influence of this reevaluation plan, 29 cryptocurrency trading platforms, including Upbit, Gopax, and Bithumb, will evaluate whether their listed tokens comply with the new regulatory requirements. These regulations will also serve as the basis for future token listings.
In addition, for overseas virtual assets, the alliance plans to implement a more flexible “alternative review scheme.” If eligible overseas virtual assets have been traded in qualified overseas markets for more than two years, they will be subject to relaxed review conditions. DAXA is currently identifying foreign exchanges that meet the criteria, including those recognized by the International Organization of Securities Commissions (IOSCO).
The Virtual Asset User Protection Act of South Korea will take effect
The Virtual Asset User Protection Act, which will take effect on July 19, aims to protect virtual asset users and establish a healthy market order. The Virtual Asset User Protection Act defines the scope of virtual assets and the exceptions, and stipulates the obligations of virtual asset operators to securely store and manage user deposits and virtual assets.
The specific contents include: expanding the scope of excluded virtual assets (South Korean Central Bank’s “CBDC” is not included in virtual assets); requiring virtual asset business operators to separate user deposits from their own assets and deposit them with custodial institutions such as banks; requiring virtual asset operators to store more than 80% of user deposits in cold wallets to protect user funds and participate in insurance plans to potentially compensate users in the event of security breaches.
In addition, unfair trading behaviors such as using undisclosed material information, manipulating market prices, and engaging in fraudulent transactions are defined as unfair trading behaviors in the Act. Violators will be held liable for compensating for losses and may be fined; arbitrary obstruction of user access to virtual assets is prohibited, and virtual currency exchange operators are required to monitor virtual asset markets for abnormal transactions, take appropriate measures, and report to financial authorities, etc.
The most powerful protection for users is that in the event of virtual asset companies going bankrupt or having their business registration revoked, banks, as custodial institutions, will publicly announce the time and place for deposit repayment in newspapers and websites, collect deposit data from users, and directly repay deposits to users upon confirmation by virtual asset operators.
Based on these contents, the Act specifies the establishment of the Virtual Asset Commission. On June 18, the proposal to establish the Virtual Asset Commission by the Financial Services Commission of South Korea was approved at the State Council. With its formal organization, 12 employees will be converted to regular positions, and five-level civil servants responsible for artificial intelligence in the financial field will be added.
The Commission will operate temporarily and be responsible for the management and supervision of establishing market order and user protection in the virtual asset market. At the same time, the Virtual Asset Commission plans to actively address unfair trading of virtual assets and carry out sanction measures such as fines and criminal prosecutions.
From the background of the Virtual Asset User Protection Act, South Korea already had the “Revised Specific Financial Information Protection Act” in 2021, which focused on anti-money laundering and introduced a review system for virtual asset practitioners. However, in terms of user protection, lawmakers believed that there was still room for improvement in the law, so discussions on virtual asset legislation were very active, mainly led by members of the National Assembly.
In April 2023, lawmakers reached an agreement and formulated the Virtual Asset User Protection Act, which focuses on urgent user protection. Since then, the two sides have gradually and incrementally improved legislative matters through agreements.
South Korean won becomes the most active cryptocurrency trading currency in Q1, but opinions on the market impact of the new legislation differ
The importance of the South Korean cryptocurrency market is growing. In the first quarter of 2024, the South Korean won was the most active currency for trading cryptocurrencies globally, surpassing the US dollar. Data from research firm Kaiko shows that in the first quarter of 2024, the accumulated trading volume of the South Korean won on centralized cryptocurrency exchanges was $456 billion, while the trading volume in US dollars was $445 billion.
The growth of trading denominated in South Korean won is partly the result of the ongoing fee war among South Korean exchanges. Smaller exchanges such as Bithumb and Korbit have recently launched zero-fee trading promotions in an attempt to attract traders from Upbit, which dominates the local market with a market share of over 80% of spot trading volume.
In South Korea, users tend to trade smaller market cap and more volatile altcoins rather than mainstream cryptocurrencies like Bitcoin and Ethereum. On average, transactions involving smaller market cap tokens account for over 80% of all activities in South Korea.
At the same time, cryptocurrency activities are attracting more attention from young Koreans. A recent survey showed that an increasing number of young Koreans view cryptocurrencies and stocks as alternative investment options for retirement, with over half of the respondents aged 20 to 39 expressing distrust in the national pension system. It is worth noting that about 7% of election candidates have disclosed digital assets in their asset declarations.
Now, the new legislation marks a new stage in the regulation of virtual assets in South Korea. Regarding the new legislation, Matt Younghoon Mok, Senior Lawyer and Partner at Lee&Ko Seoul Law Firm, said that the guidelines from the Financial Supervisory Service of South Korea may pose significant challenges to altcoins that cannot quickly meet regulatory requirements.
However, the DAXA alliance mentioned earlier explained that “major exchanges have already adopted major review items, and the phased reevaluation based on the new self-regulation standards will be conducted within six months, so it is unlikely to see a one-time large-scale delisting.”
At the same time, industry insiders in South Korea hold optimistic views on the implementation of the Virtual Asset User Protection Act and its potential to enhance the competitiveness of the domestic virtual asset market.
Yoon Chang-pae, a researcher at the Upbit Investor Protection Center, said, “We must view the impact of regulatory measures from a long-term perspective. An increase in liquidity may not be seen in the short term.” He added, “The core of the Virtual Asset User Protection Act is to enhance market stability, protect virtual asset investors, expand market stability, and may promote business expansion and new creation by preventing the monopolization of interests by specific forces through speculative trading.”
Former Chief of Seoul Eastern District Prosecutors’ Office, Kim Myung-yun, analyzed that as the scale of cryptocurrency trading grows exponentially, various side effects and related crimes are also increasing. For example, cases of price manipulation of virtual assets worth 90 billion Korean won like PICA, operation of unreported illegal virtual asset exchanges worth 580 billion Korean won, and deposit cases of Haru Invest worth 1.4 trillion Korean won.
When dealing with these cases, the main provisions of the Criminal Act regarding fraud or violations of the Revised Specific Financial Information Protection Act are applied for conviction. However, existing laws are insufficient to comprehensively cover the transaction relationships in this specialized field of virtual assets. Therefore, there are some shortcomings in addressing these issues.
Due to this uniqueness, some people believe that the implementation of the new law will lead to a contraction of virtual asset trading, such as the prohibition of market making (MM), cold wallets (offline wallets isolated from the internet), real-time monitoring of suspicious transactions, and reporting to financial authorities. However, I believe that through the implementation of the new law, virtual asset trading will become more fair and transparent, preventing the monopolization of interests by speculative trading and making the virtual asset trading field more active.
