Rumors of “Large-scale Delisting of Tokens” in South Korea Persist
Recently, the regulatory agency for virtual assets in South Korea has frequently announced new regulatory developments, and there has been a “reversal” in the news. First, there were online rumors that the regulatory agency had “notified nearly 30 registered exchanges to review the more than 600 cryptocurrencies listed, and that 16 tokens would 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 Korean exchanges. It was actually a self-regulation initiative. In fact, in order to comply with the “Virtual Asset User Protection Act” which will take effect on July 19, South Korean cryptocurrency-related regulatory agencies and self-regulatory organizations are proactively taking action.
The regulatory agency has established a “suspicious” activity monitoring system and will review 1333 types of 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 that exchanges input data and information into the system to ensure compliance with the “Virtual Asset User Protection Act” that will take effect on July 19.
The statement pointed out that danger signals include trading volume and prices exceeding normal ranges, unusually large trading volumes, and unusually slow execution speeds. The Financial Supervisory Service stated that one of the goals of this measure is to identify accounts related to “suspicious” activities.
This statement is one of a series of recent regulatory developments in South Korea. In mid-June, a list of “Korean market tokens that may be delisted in June” circulated on major virtual currency communities and social media, involving 16 tokens, which led to a sharp 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 had notified nearly 30 registered exchanges to review more than 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 Korean exchanges.
Shortly after, on July 2, the DAXA alliance, composed of the five largest cryptocurrency exchanges in South Korea, announced the launch of a six-month reevaluation plan for 1333 types of digital assets. DAXA stated that in order to comply with the implementation of the “Virtual Asset User Protection Act,” they have formulated the “Virtual Asset Trading Support Self-Regulation” and will officially implement it in domestic exchanges together with the “Virtual Asset User Protection Act” on July 19. Exchanges will conduct a reevaluation of the 1333 virtual assets from the day of implementation for a period of six months. The formulation of this self-regulation was carried out in response to the requirements of regulatory authorities such as the Financial Commission and the Financial Supervisory Service, and expert opinions were collected.
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, which will also serve as a benchmark for future token listings.
In addition, regarding overseas virtual assets, the alliance plans to implement a more flexible “alternative review scheme.” If a qualified overseas virtual asset has been traded for more than two years in recognized exchanges by the International Organization of Securities Commissions (IOSCO), certain review conditions will be relaxed. DAXA is currently determining foreign exchanges that meet the criteria.
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 law defines virtual assets and excludes certain types of virtual assets, and obligates virtual asset operators to securely store and manage user deposits and virtual assets.
Specific contents include: adding exclusions to virtual assets (the “CBDC” issued by the Bank of Korea is not included in the scope of virtual assets); requiring virtual asset business operators to separate user deposits from their own assets and store them in or entrust them to management 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 practices such as using undisclosed material information, manipulating market prices, and engaging in fraudulent transactions are defined as unfair trading practices in the law. Violators will be held responsible for compensating for losses and may be fined. Arbitrary blocking of user access to virtual assets is prohibited, and virtual currency exchange operators are required to monitor abnormal transactions in the virtual asset market, take appropriate measures, and report to financial authorities.
The most powerful protection for users is that in the event of virtual asset companies going bankrupt or their business registration being canceled, banks acting as management institutions will announce the time and place for deposit payment in newspapers and websites, receive user deposit data, and directly pay the deposits to users after confirmation by virtual asset operators.
Based on these contents, the law clearly stipulates 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 the formal organization, 12 employees have been converted to full-time positions, and five-level civil servants responsible for artificial intelligence in the financial field have been added.
The commission will operate temporarily and be responsible for the management and supervision of establishing the market order and user protection in the virtual asset market. At the same time, the commission plans to actively address unfair trading practices in virtual assets and impose penalties such as fines and criminal prosecution.
From the background of the “Virtual Asset User Protection Act,” South Korea already had the “Amendment to the Specific Financial Information Protection Act” in 2021, which approached the regulation of virtual asset operators from an anti-money laundering perspective. 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, centering around members of parliament.
In April 2023, lawmakers reached an agreement and formulated the “Virtual Asset User Protection Act” with a focus on urgent user protection. Since then, the two sides have gradually and incrementally improved legislative matters through agreements.
South Korean Won (KRW) Becomes the World’s Most Active Cryptocurrency Trading Currency in Q1, Different Opinions on the Market Impact of the New Legislation
The importance of the South Korean cryptocurrency market is growing day by day. In the first quarter of 2024, the South Korean Won became 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 cumulative trading volume of the South Korean Won on centralized cryptocurrency exchanges was $456 billion, while the trading volume of the US Dollar was $445 billion.
The growth of trading denominated in the South Korean Won is partly due to the ongoing fee war among Korean exchanges. Smaller exchanges such as Bithumb and Korbit have recently launched zero-fee trading promotions to attract traders from Upbit, which dominates the local market with a market share of over 80% in 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, trading involving smaller market cap tokens accounts for over 80% of all activities in South Korea.
At the same time, cryptocurrency activities are attracting more attention from young people in South Korea. A recent survey showed that an increasing number of young Koreans see cryptocurrencies and stocks as alternative investment options for retirement, with over half of the respondents in the 20 to 39 age group distrusting the national pension system. It is worth noting that about 7% of election candidates disclosed owning 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, a senior lawyer and partner at Lee&Ko Seoul Law Firm, said that the guidance 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 reevaluation based on the new self-regulation standards will be conducted in stages 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 an optimistic view 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, stated, “The impact of regulatory measures should be viewed from a long-term perspective. Increased 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 in the future by preventing specific forces from monopolizing interests through speculative trading.”
Former Seoul Eastern District Public Prosecutor General Kim Myung-yoon analyzed that with the exponential growth of cryptocurrency trading volume, various side effects and related crimes are also increasing. For example, cases of price manipulation of virtual assets worth KRW 90 billion like PICA, cases of unreported illegal operation of virtual asset exchanges worth KRW 580 billion, and cases of Haru Invest deposits worth KRW 1.4 trillion.
When handling these cases, the main provisions of the “Criminal Act” regarding fraud or violations of the “Amendment to the Specific Financial Information Protection Act” are mainly applied for conviction. However, existing laws have limitations in fully covering the transaction relationships in this particular field of virtual assets. Therefore, there are some shortcomings in solving problems.
Due to this uniqueness, in order to prove criminal suspicions related to virtual asset transactions, such as the existence of fraudulent behavior and the causal relationship between mistakes and disposal actions, investigative authorities need to invest more effort and time compared to other cases.
“Some people think 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, prevent the monopolization of interests by specific forces due to speculative trading, and will make the virtual asset trading field more active.”