South Korea’s first major set of cryptocurrency regulations is now live to safeguard crypto investors in the nation.

The new framework introduces stringent requirements for Virtual Asset Service Providers (VASPs). Dubbed the Protection of Virtual Asset Users (PVAU), it mandates VASPs to hold at least 80% of users’ digital assets in cold storage.

The Financial Services Commission (FSC) will designate credible financial institutions to handle fiat deposits made towards VASPs. Further, VASPs must segregate customer funds from VASP funds and invest them in “risk-free” assets to generate a yield.

This safeguard ensures that in the event of a cryptocurrency exchange going bankrupt, the respective financial institutions would directly repay customer funds.

These measures are a direct response to the collapse of Terra-Luna and FTX, which wiped off billions of dollars worth of customer funds. Both entities’ implosions heavily impacted South Korea, especially FTX, which saw more than 6% of its traffic come from the East Asian country.

Besides the aforementioned mandates, VASPs are also required to be insured or have a reserve fund in place to mitigate the damage in the event of a hack or liquidity crisis.

Further, the law includes provisions for VASPs to restrict user deposits and withdrawals under certain conditions, offering further control over irregular activities.

The Financial Supervisory Service (FSS), the executive arm of the FSC, has also established a real-time monitoring system in collaboration with cryptocurrency exchanges for “constant monitoring of abnormal transactions.” This system’s implementation was also set for July 19, alongside the User Protection Act.

The regulator claims this system will cover 99.9% of the country’s crypto trading volume. If any abnormalities are identified, they must be reported to the FSS via a dedicated data transmission line.

When the system was introduced in early July, 29 crypto exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, registered with the FSS regarding this.

The recent enforcement follows South Korea’s Ministry of Economy and Finance delaying the 20% crypto gains tax set to be implemented early next year. The nation’s ruling party is reportedly considering postponing it to 2028.

South Korea’s Financial Services Commission (FSC) is changing its stance regarding nonfungible tokens (NFTs), looking to classify some of them as Virtual assets.

NFTs are primarily unique assets that cannot be replicated, traits that differentiate them from cryptocurrencies would be treated as virtual assets, a June 10 report by South Korea’s FSC noted.

Specifically, the report that NFTs are divisible, can be produced in masses, or can be used as a means of payment, all of which are now classified under South Korea’s newest framework.

Businesses that issue NFTs classified as virtual assets are now obliged to report it to the South Korean watchdog.

The new directive comes ahead of the nation’s first crypto regulatory framework set to be implemented on July 19.

According to Jeon Yo-seop, the FSC’s Financial Innovation Planning head,  NFT collections minted in huge quantities are most likely to be used as payment.

As an example, the official stated that if one million NFTs were issued in a collection, they could be traded and used as payment, just like cryptocurrencies.

He suggested that there wouldn’t be one single standard to classify NFTs as virtual assets. Rather, the FSC will make the distinction via a case-by-case review approach.

Further, if an NFT possesses characteristics of financial security as detailed in the country’s Capital Markets Act, they may be classified as securities.

With the implementation of the new guidelines, some NFTs may even be eligible to receive interest when deposited in an exchange. This is per a notice from the FSC, issued late last year, that mandates virtual assets deposited on crypto exchanges to be eligible for interest generation.

However, regular NFTs and CBDCs are excluded from this benefit.

The new framework is a part of South Korea’s crypto legislation dubbed the Virtual Asset User Protection Act. Set to come into force a week later, it seeks to criminalize malpractices such as using undisclosed information for crypto investments, manipulating market prices, and engaging in fraudulent transactions.

The bill was passed in 2023 by the nation’s National Assembly. Cryptocurrency-focused entities were subsequently given a one-year grace period to comply with the regulations.

To complement these efforts, South Korean regulators have also launched a crypto crimes unit. Dubbed the Joint Virtual Asset Crime Investigation Unit, the entity comprised 30 experts from seven national agencies.