Rumors of “Large-scale Delisting of Tokens” Persist in Korea
Recently, the regulatory agency for virtual assets in Korea has frequently announced new regulatory developments, and there has been a “reversal” in market sentiment. First, there were online rumors that the regulatory agency had “notified nearly 30 registered exchanges to review the 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 18th, the Financial Services Commission (FSC) of Korea clarified that it would not directly participate in the inspection of cryptocurrencies listed on Korean exchanges, emphasizing that it was an industry self-check. In fact, in order to comply with the Virtual Asset User Protection Act, which will take effect on July 19th, regulatory agencies and self-regulatory organizations for cryptocurrency in Korea are actively taking action.
The regulatory agencies are establishing a “suspicious” activity monitoring system and will review 1,333 virtual assets over a period of six months.
The latest news is that on July 4th, the Financial Supervisory Service (FSS) of Korea stated in a press release 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, effective from July 19th.
The statement pointed out that danger signals include trading volume and prices exceeding normal ranges, excessive trading volume, and unusually slow execution speeds. The financial regulatory agency stated that one of the goals of this measure is to identify accounts related to “suspicious” activities.
This statement is one of the recent series of regulatory developments in Korea. In mid-June, a list of “Korean market tokens that may be delisted in June” circulated in major cryptocurrency communities and social media, involving 16 tokens, leading 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 over 600 cryptocurrencies.
However, on June 18th, the FSC clarified that it would not directly participate in the inspection of cryptocurrencies listed on Korean exchanges.
Shortly after, on July 2nd, the DAXA alliance, composed of the five largest cryptocurrency exchanges in Korea, announced the launch of a six-month re-evaluation plan for 1,333 digital assets. DAXA stated that it has formulated the “Virtual Asset Trading Support Self-Regulation” to comply with the implementation of the Virtual Asset User Protection Act and will be formally implemented together with the act on July 19th in domestic exchanges. Exchanges will conduct re-evaluations of the 1,333 virtual assets over the six-month period starting from the implementation date. The formulation of this self-regulation was done in response to requests from regulatory authorities such as the Financial Commission and the Financial Supervisory Service, and expert opinions were collected.
Under the influence of this re-evaluation plan, 29 cryptocurrency trading platforms, including Upbit, Gopax, and Bithumb, will evaluate whether their listed tokens meet the new regulatory requirements. These regulations will also serve as the basis for future token listings.
In addition, with regard to overseas virtual assets, the alliance plans to implement a more flexible “alternative review scheme.” If the assets have been traded on qualified overseas virtual asset markets for more than two years, certain review conditions will be relaxed. DAXA is currently determining the foreign exchanges that meet the requirements, including those recognized by the International Organization of Securities Commissions (IOSCO).
The Virtual Asset User Protection Act of Korea will take effect
The Virtual Asset User Protection Act, which will take effect on July 19th, aims to protect virtual asset users and establish a healthy market order. The Act defines virtual assets and the exclusions, and stipulates the obligations of virtual asset operators to securely store and manage user deposits and virtual assets.
Specific provisions include: expanding the exclusions of virtual assets (the “CBDC” issued by the Bank of Korea is not included in the definition of virtual assets); requiring virtual asset business operators to separate user deposits from their own assets and deposit or entrust them to management institutions, such as banks; requiring virtual asset operators to keep 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.
Additionally, unfair trading practices such as using undisclosed material information, manipulating market prices, and fraudulent transactions are defined as unfair trading practices in the Act, and those found in violation will be held liable for compensation and may be subject to fines. It also prohibits arbitrary blocking of user access to virtual assets, requires virtual currency exchange operators to monitor virtual asset markets for abnormal trading, take appropriate measures, and report to financial authorities, among other provisions.
The most powerful protection for users is that in the event of virtual asset companies going bankrupt or being deregistered, banks, as management institutions, will publicly announce the time and place for deposit payment in newspapers and websites, receive user deposit data, and directly pay users the deposits upon confirmation by the virtual asset operator.
Based on these provisions, the Act specifies the establishment of the Virtual Asset Committee. On June 18th, the proposal to establish the Virtual Asset Committee by the Financial Services Commission was approved during a cabinet meeting. With the formal organization, 12 employees were converted to regular positions, and five-level government officials responsible for artificial intelligence in the financial field were added.
The Committee will operate temporarily and be responsible for the management and supervision of establishing market order and user protection in the virtual asset market. The Virtual Asset Committee also plans to actively address unfair trading practices in virtual assets and impose sanctions such as fines and criminal prosecutions.
From the background of the Virtual Asset User Protection Act, it can be seen that Korea already had the “Amendment to the Act on Specific Financial Information Protection” in 2021, which focused on anti-money laundering measures and introduced a review system for virtual asset operators. However, in terms of user protection, legislators believed that there was still room for improvement in the law, so discussions on virtual asset legislation were very active, mainly led by members of the National Assembly.
In April 2023, an agreement was reached among legislators, and the Virtual Asset User Protection Act, with a focus on urgent user protection, was formulated. Since then, the two sides have gradually and incrementally improved legislative matters.
Korean won becomes the most active cryptocurrency trading currency in Q1, but market impact opinions vary
The importance of the Korean cryptocurrency market is growing day by day. In the first quarter of 2024, the Korean won was 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 accumulated trading volume of the Korean won on centralized cryptocurrency exchanges was $456 billion, while the trading volume in US dollars was $445 billion.
The growth in Korean won-denominated trading 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 Korea, users tend to trade smaller market cap and more volatile altcoins rather than mainstream cryptocurrencies like Bitcoin and Ethereum. On average, trades involving smaller market cap tokens account for over 80% of all activities in Korea.
At the same time, cryptocurrency activities are attracting more attention from young Koreans. A recent survey showed that an increasing number of young Koreans are considering cryptocurrencies and stocks as alternative investment options for retirement, with over half of the respondents aged 20 to 39 expressing distrust in the national pension system. Notably, about 7% of election candidates have disclosed digital assets in their asset declarations.
Now, the new legislation marks a new phase for the regulation of virtual assets in Korea. Regarding the new legislation, Matt Younghoon Mok, a senior lawyer and partner at Lee & Ko Seoul Law Firm, stated that the guidance from the Financial Supervisory Service of Korea may pose significant challenges for 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 re-evaluation based on the new self-regulation standards will be carried out in stages over six months, so a one-time large-scale delisting is unlikely.”
Meanwhile, industry insiders in Korea hold optimistic views 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-bae, a researcher at the Upbit Investor Protection Center, stated, “The impact of regulatory measures must be viewed from a long-term perspective. An increase in 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, and expand market stability, which may promote business expansion and create new opportunities.”
Former Seoul Eastern District Prosecutor General Kim Myung-yun analyzed that as the scale of cryptocurrency trading increases exponentially, various side effects and related crimes are also on the rise. For example, cases of price manipulation involving PICA, with virtual assets worth 90 billion Korean won, cases of illegal virtual asset exchange operation amounting to 580 billion Korean won, and deposit cases involving Haru Invest totaling 1.4 trillion Korean won.
When dealing with these cases, the main legal provisions applied are those related to fraud in the Criminal Act or violations of the revised Act on Specific Financial Information Protection. However, existing laws are insufficient to comprehensively cover transaction relationships in this specific field of virtual assets, so there are some shortcomings in resolving these issues.
Due to this specificity, in order to prove criminal suspicions related to virtual asset transactions, such as the existence of fraudulent activities and the causal relationship between errors and disposal actions, investigative authorities need to invest more effort and time compared to other cases.
“Some people believe that the implementation of the new law will lead to a contraction of virtual asset transactions, as it prohibits ‘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 the implementation of the new law will make virtual asset transactions fairer and more transparent, preventing the monopolization of interests by specific powers due to speculative trading, and thus making the virtual asset trading field more active.”