South Korea Enacts First Crypto Law to Regulate and Protect the Crypto Market

According to the Assembly's official website, South Korea's National Assembly adopted a measure aimed at safeguarding the rights of cryptocurrency investors on Friday, marking the country's first move towards developing a legal framework devoted to such digital assets. The proposal, known as the Virtual Asset User Protection Act, is anticipated to become law within a year.

The crypto bill, a collection of 19 legislative proposals, requires cryptocurrency service providers to protect customers' assets and deposits, to have insurance, to set aside a portion of reserves in offline cold wallets in the event of hacks or system failures, and to maintain a log of all transactions.

Penalties are included in the Act for price manipulation, fraudulent advertising of crypto assets, and failure to disclose relevant investor information. Those found guilty face a minimum of one year in jail or a fine of three to five times the earnings from such infractions.

"Virtual assets" are defined in the law as an "electronic representation of an economic value that can be traded or transferred electronically." The central bank digital currency (CBDC) issued by the Bank of Korea, the country's central bank, is not included in the law.

On the other hand, the law grants the Bank of Korea the authority to seek data from cryptocurrency platforms, a power it has been pushing for with the country's financial authorities. According to the bank, the bitcoin market might substantially influence financial and monetary stability and so requires some control.

According to Hwang Suk-jin, a People Power Party's Digital Asset Special Committee member, the proposed law will give users of virtual assets legal protections and create a more secure and stable market for cryptocurrencies.

South Korea had one of the world's most active cryptocurrency economies as of 2020, ranking seventh on the Global Crypto Adoption Index produced by blockchain data company Chainalysis.

However, the country dropped to number 23 on the index in 2022, the same year that the Terra-Luna cryptocurrency and stablecoin, which was established in the country and caused significant losses to hundreds of thousands of investors, failed to a US$40 billion loss. Regardless, according to CoinMarketCap data, the Upbit crypto exchange in South Korea is the world's third-largest by trading volume.

The Terra-Luna fiasco influenced legislation in South Korea to create a legal framework for cryptocurrencies, primarily focusing on investor protection. The next wave of crypto legislation will likely focus on token issuance and information disclosure standards for domestic enterprises.