South Korea Mandates Crypto Exchanges to Secure 80% of Assets in Cold Storage

With the intention of protecting cryptocurrency investors, South Korea has passed its first significant set of laws. In order to provide more security and transparency, these new regulations, known as the Protection of Virtual Asset Users (PVAU), place stringent restrictions on Virtual Asset Service Providers (VASPs).

VASPs must keep at least 80% of consumers’ digital assets in cold storage according to the PVAU framework. The purpose of this approach is to safeguard assets against hacking incidents and cyber threats. In addition, respectable financial institutions will be chosen by the Financial Services Commission (FSC) to oversee fiat deposits made to VASPs. This guarantees the safety and separation of consumer cash from the operating funds of the VASPs.

VASPs are also mandated to invest customer funds in “risk-free” assets to generate a yield. This approach guarantees that, in the event of a cryptocurrency exchange bankruptcy, the designated financial institutions can directly repay customer funds.

Response to Past Crises

These stringent regulations are a direct response to the collapses of Terra-Luna and FTX, which resulted in significant financial losses for investors. The FTX implosion, in particular, had a substantial impact on South Korea, with over 6% of its traffic coming from the country. To prevent similar incidents, the PVAU requires VASPs to be insured or maintain a reserve fund to cover potential losses due to hacks or liquidity crises.

Additionally, VASPs must restrict user deposits and withdrawals under certain conditions to mitigate irregular activities. This provision offers further control and security for investors.

The Financial Supervisory Service (FSS), the executive arm of the FSC, has implemented a real-time monitoring system in collaboration with cryptocurrency exchanges. This system, launched alongside the User Protection Act on July 19, aims to provide “constant monitoring of abnormal transactions.” It is expected to cover 99.9% of the country’s crypto trading volume. Any detected irregularities must be reported to the FSS via a dedicated data transmission line.

When the system was introduced in early July, 29 crypto exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, registered with the FSS to comply with these new regulations.

This regulatory push comes as South Korea’s Ministry of Economy and Finance considers postponing the 20% crypto gains tax, originally set for implementation early next year, to 2028. The recent regulations underscore South Korea’s commitment to fostering a secure and transparent cryptocurrency market while balancing investor protection and market growth.