Act on the Protection of Virtual Asset Users

How will my virtual assets be protected in the future?

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Hello, Mossland Community!

Did you know that the Virtual Asset User Protection Act will come into effect next month?

The Korean government has announced that the “Virtual Asset User Protection Act (Virtual Asset Act)” will be implemented from July 19, 2024. This act aims to protect users’ rights and interests by safeguarding virtual assets and regulating unfair trading practices, thereby establishing a transparent and sound trading order.

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Through this post, let’s examine the Virtual Assets Consumer Protection Act together and also confirm how your virtual assets will be protected in the future.

💠 What are virtual assets?

“Virtual assets” refer to electronically tradable or transferable representations of economic value, including any rights related thereto. Typically traded only in cyberspace, these assets exist in digital form on devices and are valued according to rules established by their creators. While initially referred to as cryptocurrencies or virtual currencies, governments and international organizations are increasingly standardizing the term “assets” instead of “currencies” to describe them.

*On June 10, 2024, through the NFT guidelines, it was announced that the following types of NFTs are also included in virtual assets:

• Issued in large quantities or as part of a large series with significant substitutability
• Capable of being divided, thereby significantly diminishing uniqueness
• Able to be used as a direct or indirect means of payment for specific goods or services (fungibility)
• Exchangeable as virtual assets or linked to goods/services for payment

Exceptions to virtual assets)

• Electronic tokens or information related thereto that cannot be exchanged for currency, goods, or services, with issuers restricting their use and purpose
• Tangible or intangible outcomes acquired through the use of video games
• Prepaid electronic payment means and electronic currencies under the Electronic Financial Transactions Act
• Electronic registered shares and electronic bills of exchange
• Electronic bonds
• Electronic forms of currency issued by the Bank of Korea and related services
• Those designated by presidential decree considering the form and characteristics of transactions
• NFTs with minimal economic value or functionality, or those that cannot be traded or transferred
• NFTs issued solely for proof of transaction (receipt) or as tickets for exhibition or viewing purposes

💠 What is a virtual asset service provider?

In Article 2 of the Act on Reporting and Use of Specific Financial Transaction Information, virtual asset service provider is defined as “a person engaged in the business of selling, purchasing, exchanging, transferring, storing, managing, intermediating, or arranging virtual assets.”

1. The act of buying and selling virtual assets.

2) The act of exchanging virtual assets with other virtual assets.

3) The act of transferring virtual assets as prescribed by Presidential Decree. (All acts of transferring virtual assets for the purpose of buying, selling, exchanging, storing, or managing virtual assets at the request of customers, as defined in Article 1–2 of the Enforcement Decree of the same law.)

4) The act of storing or managing virtual assets.

5) The act of intermediating or arranging the buying and selling, exchange, or transfer of virtual assets as described in 1) and 2) above.

6) Acts specified by law that are highly likely to be used for money laundering activities or the raising of public threats related to virtual assets.

💠 Protection of User Assets

🔹 Protection of Deposits

1. Separate Custody:

• Virtual asset service providers must deposit or entrust user deposits with reputable institutions (such as banks) separately from their own assets.

2. Cold Wallet Storage:

• Virtual assets representing more than 80% of economic value must be stored in cold wallets.

3. Disclosure Obligation:

• When depositing or entrusting, it must be disclosed that the deposit belongs to the user’s property.

4. Restrictions:

• Deposits entrusted to the management agency cannot be set off or seized. Except as prescribed by Presidential Decree, deposits cannot be transferred or provided as collateral.

5. Priority Payment Conditions:

In the following cases, deposits must be prioritized for payment upon user demand:

• Revocation of business registration
• Resolution for dissolution or merger
• Declaration of bankruptcy

🔹 Custody of Virtual Assets

1. Compilation and Display of User Registry:

• User’s address and full name
• Type and quantity of entrusted virtual assets
• User’s virtual asset addresses

2. Separate Custody:

• Must separate one’s own virtual assets from those entrusted by users.
• Must actually possess virtual assets of the same type and quantity as those entrusted.

3. Secure Storage:

• Must securely store virtual assets offline in accordance with the ratio specified by Presidential Decree.

4. Entrusted Storage:

• May entrust users’ virtual assets to institutions meeting security standards for storage.

🔹 Insurance Enrollment and Others

1. Mandatory Insurance Enrollment:

• Virtual asset service providers must enroll in insurance or set aside reserves based on the economic value of virtual assets held in hot wallets, with a minimum coverage limit of at least 5%.

2. Minimum Insurance Enrollment Amount:

• For Korean won market exchanges: Minimum of over 3 billion KRW.
• For coin market exchanges and wallet operators: Minimum of over 500 million KRW.

3. Situation in South Korea:

• Currently, there are no insurance products available for virtual asset users in Korea.
• The Korea Insurance Development Institute has indicated its readiness to develop insurance products under the Virtual Asset User Protection Law.

4. Overseas Examples:

• Great American Insurance (USA): Launched a product in 2014 that insures against crimes involving internal employees of institutions holding Bitcoin.
• Lloyd’s of London (UK): Provides insurance products covering hacking, theft, and losses of hot wallets through Coincover.
• Everest (USA): Offers executive indemnity insurance for virtual asset companies and liability insurance for technology errors and faults.

🔹 Creation, Preservation, and Destruction of Transaction Records

1. Creation and Preservation of Records:

• Virtual asset service providers must preserve records that allow the tracking, searching, error checking, and correction of virtual asset transactions such as buying and selling.
• These records must be preserved for 15 years after the termination of the transaction relationship.

2. Record Management Standards:

• The types of records to be preserved, the methods of storage, and the procedures and methods for destruction are determined by Presidential Decree.

💠 Prohibition of Unfair Trading Practices

1. Prohibition on Using Insider Information Related to Virtual Assets:

• Virtual asset service providers, issuers, and their employees must not use or allow others to use undisclosed important information.

2. Prohibition on Major Shareholders Using Information:

• Major shareholders must not use or allow others to use undisclosed important information they become aware of during the exercise of their rights.

3. Prohibition on Supervisors Using Information:

• Those with supervisory authority over virtual asset service providers or issuers must not use or allow others to use undisclosed important information obtained in the course of supervision.

4. Prohibition on Contractual Parties Using Information:

• Those who enter into or negotiate contracts with virtual asset service providers or issuers must not use or allow others to use undisclosed important information obtained during this process.

5. Prohibition on Agents and Employees Using Information:

• Agents, employees, and others associated with the aforementioned parties must not use or allow others to use undisclosed important information related to their duties.

6. Prohibition on Recipients of Undisclosed Information:

• Recipients of undisclosed important information must not use or allow others to use such information.

7. Prohibition on Using Information by Others Specified by Presidential Decree:

• Other persons specified by Presidential Decree must not use or allow others to use undisclosed important information.

8. Prohibition on Manipulating Trading Activity:

• Engaging in actions that create the false impression of active trading or that mislead others into making erroneous judgments is prohibited.

9. Prohibition on Pre-arranged Trading:

• Engaging in pre-arranged agreements to buy or sell at specific prices is prohibited.

10. Prohibition on Fake Trades:

• Conducting trades that do not intend to transfer ownership rights is prohibited.

11. Prohibition on Using Fraudulent Means:

• Using fraudulent means, schemes, or artifices in the trading of virtual assets is prohibited.

12. Prohibition on Providing False Information:

• Making false statements or omissions of necessary information regarding important matters is prohibited.

13. Prohibition on Using False Prices:

• Using false prices to induce virtual asset transactions is prohibited.

14. Restriction on Trading Self-Issued or Related Party Virtual Assets:

• Except for specific cases, virtual asset service providers are prohibited from trading virtual assets issued by themselves or related parties.

15. Liability for Damages:

• If a user incurs damage due to a violation of these rules, the violator is liable for compensating the damage.

🔹 Prohibition on Arbitrary Blocking of Deposits and Withdrawals of Virtual Assets

1. Prohibition on Arbitrary Blocking:

• Virtual asset service providers must not block users’ deposits and withdrawals of virtual assets without legitimate reasons.

2. Obligation to Notify and Report in Case of Blocking:

• If it is necessary to block deposits and withdrawals of virtual assets, the user must be notified of the reason in advance, and the Financial Services Commission must be informed immediately.

3. Liability for Damages:

• If a user incurs damages due to a violation of these regulations resulting in blocked deposits or withdrawals, the violator is liable for compensating the damages.

4. Statute of Limitations for Claims for Damages:

• Claims for damages expire if not exercised within 2 years from the date the violation became known or within 5 years from the date the violation occurred.

🔹 Monitoring of Suspicious Transactions

1. Monitoring and Action on Suspicious Transactions:

• Virtual asset service providers must continuously monitor for abnormal fluctuations in virtual asset prices or trading volumes.
• If suspicious transactions occur, appropriate measures must be taken to protect users and maintain a sound trading order.

2. Obligation to Notify of Violations:

• If suspicious transactions are detected that suggest possible violations, the Financial Services Commission and the Financial Supervisory Service must be notified without delay.
• If there is sufficient evidence of a violation, the matter must be reported to investigative authorities, and the Financial Services Commission and the Financial Supervisory Service must be informed of this report.

💠 Supervision and Disposition

🔹 Supervision and Inspection of Virtual Asset Service Providers

1. Inspection of Business and Financial Status:

• The Financial Services Commission can inspect the business operations and financial status of virtual asset service providers and may order the submission of materials to verify compliance with laws and regulations.

2. User Protection and Maintenance of Trading Order:

• To protect users and maintain a sound trading order, the Commission can order necessary measures concerning the management of proprietary assets, the custody and management of users’ assets, maintenance of trading order, business methods, and user protection in the event of business suspension.

3. Requirements During Inspection:

• During an inspection, the Commission can require reports on business or financial matters, submission of materials, attendance of witnesses, testimony, and statements of opinions.

🔹 Investigation and Measures Against Unfair Trading Practices

1. Reporting and Material Submission Requirements:

• For violations of the law or for the protection of users and the maintenance of trading order, the relevant parties may be ordered to report or submit materials, or the Financial Supervisory Service may be instructed to conduct an investigation.

2. Investigation Authority:

• During an investigation, the relevant parties may be required to submit statements, attend hearings, and provide books, documents, and items.

3. On-Site Investigation and Seizure:

• If necessary, submitted books, documents, and items may be seized, or investigations may be conducted by entering the offices or business premises of the relevant parties.

4. Data Submission Requirement for Virtual Asset Service Providers:

• If necessary, virtual asset service providers may be required to submit materials in a manner prescribed by Presidential Decree.

5. Disclosure:

• Investigation results, handling outcomes, and information necessary for preventing illegal activities may be disclosed in a manner prescribed by Presidential Decree.

🔹 Measures Against Virtual Asset Service Providers

If a virtual asset service provider engages in unfair trading practices or violates relevant laws, the Financial Services Commission can take the following actions:

1. Measures Against the Provider:

• Correction orders, warnings, cautions, suspension of all or part of business operations, notification or filing a complaint to investigative authorities.

2. Measures Against Executives and Employees:

• Recommendations for dismissal or suspension from duties for up to 6 months, demands for dismissal or suspension of employees, cautions, warnings, or disciplinary requests.

3. Conducting Hearings:

• The Financial Services Commission must conduct a hearing when recommending dismissal or demanding the removal of personnel.

🔹 Data Submission Requests by the Bank of Korea

The Bank of Korea can request data submissions from virtual asset service providers in the following cases:

1. When necessary for the implementation of monetary and credit policies
2. When necessary for financial stability
3. When necessary for the smooth operation of the payment and settlement system

🔹 Fines for Unfair Trading Practices

1. Fine Amount:

• Up to twice the profit gained or the loss avoided through unfair trading.
• If there is no profit or loss, or if it is difficult to calculate, the fine can be up to 4 billion KRW.

2. Fines and Administrative Penalties:

• If a fine is imposed, the administrative penalty can be canceled, or the amount of the fine can be deducted from the administrative penalty.

3. Procedures:

• Procedures for submitting opinions, filing objections, extending payment deadlines, installment payments, collection and delinquent dispositions, refunds of overpaid amounts, refund interest, and disposition of deficits follow the Capital Markets Act and the Financial Investment Services and Capital Markets Act.

💠 Penalties

🔹 Penalties for Virtual Asset Service Providers

1. Use of Undisclosed Important Information:

• Imprisonment for at least 1 year or a fine of at least 3 times but not more than 5 times the profit gained or the loss avoided.

2. Providing False Information About Transactions:

• Imprisonment for at least 1 year or a fine of at least 3 times but not more than 5 times the profit gained or the loss avoided.

3. Inducing Transactions or Manipulating Prices:

• Imprisonment for at least 1 year or a fine of at least 3 times but not more than 5 times the profit gained or the loss avoided.

4. Trading Virtual Assets by Self or Related Parties:

• Imprisonment for up to 10 years or a fine of at least 3 times but not more than 5 times the profit gained or the loss avoided.

Aggravated Conditions for Punishment:

• If the profit gained or the loss avoided is 500 million KRW or more:
  - 5 billion KRW or more: Life imprisonment or imprisonment for at least 5 years.
  - Between 500 million KRW and 5 billion KRW: Imprisonment for at least 3 years.
• If trading virtual assets by self or related parties:
  - 5 billion KRW or more: Imprisonment for at least 3 years.
  - Between 500 million KRW and 5 billion KRW: Imprisonment for at least 2 years.

Additional Penalties for Imprisonment:

• In case of imprisonment, disqualification for up to 10 years and a fine can be imposed simultaneously.

🔹 Confiscation and Seizure

Property obtained through illegal acts shall be confiscated, and if confiscation is not possible, its value shall be seized.

🔹 Dual Liability Provision

1. Scope of Liability: If a legal entity’s representative, agent, employee, or worker violates the law, both the individual perpetrator and the legal entity shall be subject to fines.
2. Exceptional Condition: Legal entities or individuals who have exercised reasonable care and supervision to prevent the violation shall be exempted from fines.

🔹 Administrative Fines

A virtual asset service provider engaging in the following actions shall be subject to administrative fines of up to 100 million KRW:

• Failure to manage user deposits properly
• Failure to properly safeguard user virtual assets
• Failure to subscribe to insurance or deduction, or accumulate reserves as required
• Failure to create, preserve, or destroy virtual asset transaction records Failure to report or providing false reports
• Failure to take appropriate measures against abnormal transactions
• Failure to comply with or obstruct, refuse, or avoid inspections, investigations, orders, or demands

Have you grasped some understanding of the Virtual Asset Consumer Protection Act?

The Virtual Asset Consumer Protection Act is structured into two phases, focusing first on investor protection and then on establishing market order. Phase 1 emphasizes obligations to protect user assets and addresses unfair trading practices. Additionally, Phase 2 will further strengthen market order through measures such as virtual asset issuance and disclosure. We’ll introduce specific details about Phase 2 as the legislation unfolds. We encourage all Mosland members to take an interest in the Virtual Asset Consumer Protection Act to ensure the protection of their virtual assets. Thank you.

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