SOUTH KOREA STEPS UP ITS LAWMAKING IN VIRTUAL ASSETS-RELATED REGULATORY ENVIRONMENT (PART2)

( by Andrew Baek, August 27, 2023 )

The previous article briefly covered how the Act on the Protection of Virtual-Asset Users (the “Act”) was conceived. The following will provide details on some of its provisions and ramifications thereof.

The Act seeks to protect users of virtual assets (“User(s)”) by regulating the service providers of virtual assets (“Service Provider(s)”). A Service Provider is defined in the Act as someone who buys and sells virtual assets as a business (including intermediating, brokering, or agenting thereof) or someone who engages in the business of exchanging, transferring, storing, or managing virtual assets. A virtual asset is then defined as a tradable and transferrable electronic certificate with economic value (including all rights thereto) subject to certain exclusions. These exclusions include electronic certificates that are unexchangeable for money, goods, or services, used only for a limited purpose at a limited place as designated by its issuer, in-game currencies or items obtained from and used only within the game, electronic bills, electronic bill of lading, electronic prepayment means, electronically registered stocks, electronic currencies exchangeable for cash or deposits of equal value, and CDBC. Roughly put, the Act intends to focus its regulations on virtual assets that neither have minimal to zero cashability nor have near-cash equivalent or cash equivalent economic value, also excluding those that are already regulated well enough by existing laws and regulations.

One of the key regulatory measures implemented under the Act is the protection of User assets. The Users would deposit money with Service Providers in order to use their services to purchase virtual assets. The Service Providers entrust banks with the safekeeping of such deposits. Recently, shockingly enough, one of these banks admittedly used User funds as loan capital. Now the Act stipulates that presidential decree will designate the credible institutions with which such funds shall be deposited or entrusted and prescribe the methods by which the institutions shall manage the funds. Hopefully, a meticulously drafted decree will soon be issued for the protection of User funds.

Another major concern for Users is the sudden suspension of deposits and/or withdrawals in virtual-asset exchanges. Under the Act, the Service Provider who operates such exchange is prohibited from suspending deposits and/or withdrawals without giving prior notice to its Users and may execute suspension only on limited grounds to be set forth in the presidential decree to be issued. Considering such suspensions are often due to unforeseen technical causes such as server error, it is difficult to assess the efficacy of the notice requirement at this time. Nevertheless, the provision provides for legal grounds upon which Users may bring damage claims against Service Providers responsible for unjustified suspension of deposits and/or withdrawals.

​– to be continued in PART3