South Korea passes bill aimed at protecting consumers a year after Terra’s collapse

Getting your Trinity Audio player ready...

South Korean lawmakers have passed a new law to protect investors from the inherent risks associated with digital currency trading as part of attempts to weed out bad actors from the ecosystem.

The Virtual Asset User Protection Act was passed on June 30 after scaling through the legislative procedure at the National Assembly. A central theme of the new law is the classification of digital assets as securities, a move that will bring the industry within the purview of existing capital market laws.

By virtue of the provisions, the primary regulator of digital asset service providers in South Korea will be the Financial Services Commission (FSC). After heated legislative horsetrading, it was decided that the FSC would share supervisory powers with the Bank of Korea (BoK), given the potential of the asset class to disrupt financial stability.

The new law mandates industry service providers to adhere to proper corporate governance procedures and take pre-emptive steps to prevent black swan events like security breaches. Operators must also have a robust insurance policy, avoid commingling customers’ funds, and make necessary disclosures to regulatory agencies.

Despite the guardrails put in place by the new law, pundits have poked holes in the legislation as being a reiteration of decades-old existing financial rules.

“The law, in general, remains stuck in the perspective of traditional finance in terms of regulating crypto,” said Lee Suh Ryoung, an executive at the Korea Blockchain Enterprise Promotion Association.

A community reading of the bill indicates stiff penalties for defaulters, combining jail terms and fines. The bill stipulates a term of imprisonment of not less than a year for violating the provisions against price manipulation and other unfair business practices.

The law also empowers the FSC to impose fines twice the size of the amount obtained via unfair acts following an amendment of the Capital Markets Act. In cases where investigators cannot calculate the amount of profit stemming from price manipulations, the law provides a fixed penalty of KRW 4 billion ($3 million).

Still haunted by the specter of Terra

South Korea’s new law flows from the government’s desire to avoid a repeat of Terra’s implosion that wiped off the fortunes of the country’s digital asset investors.

Since Terra’s collapse, South Korean authorities have instituted criminal proceedings against Terraform Lab executives, culminating in the seizure of over $200 million worth of assets.

The country is currently in a scramble with the U.S. for the extradition of embattled Terraform Labs founder Do Kwon, stating that it has reams of evidence to put Kwon behind bars for 40 years.

Watch: Crypto regulation will make life easier for BSV