South Korea Implements New Crypto Regulations to Refund Investors in Case of Bankruptcy

Starting next month, cryptocurrency investors in South Korea will benefit from new rules designed to protect user funds in the event of a cryptocurrency exchange bankruptcy.

The Financial Services Commission (FSC) has announced government approval of an executive order aimed at enhancing confidence in the country's digital asset market.

These newly passed virtual asset regulations go beyond simply providing safety nets for user funds during exchange troubles. They represent a broader effort to regulate the digital currency sector in South Korea. Effective from July 19, the measures will clearly define and categorize virtual assets while establishing mechanisms to combat unfair business practices.

Under the new decree, Virtual Asset Service Providers (VASPs) will be required to hold customer funds at reputable financial institutions, separate from the company's own assets. This step is intended to mitigate the risks associated with exchange insolvency and to boost user confidence in the Korean cryptocurrency market.

In the event of a VASP facing bankruptcy or closure, the custodian bank will step in to return user deposits directly to customers, following public announcements through newspapers and online platforms.

VASPs must now store at least 80% of user digital assets in cold storage (secure offline wallets). It is worth noting that cold storage is highly secure and not connected to the internet, thereby reducing the risks of hacking or loss.

Moreover, authorities can impose stricter cold storage requirements on a specific VASP if there are concerns about security breaches, fraudulent activities, or potential business closure.

The new regulations also address manipulative activities in the digital currency market, with severe consequences for those caught cheating. Exploiting the system for unfair financial gain can now lead to criminal charges and hefty fines. Offenders face a minimum of one year in prison or fines up to five times the amount of their illegal profits.

This month, a South Korean court upheld a 10-year prison sentence for cryptocurrency fraudster "Wei," who defrauded hundreds of investors out of $82.6 million. Wei's scam involved luring victims with promises of "guaranteed" returns, ultimately leading to his legal troubles.

Additionally, the new rules grant VASPs the authority to restrict user deposits and withdrawals under certain conditions.