[Column] Implementation of the Virtual Asset User Protection Act and remaining tasks

On July 19th, the Virtual Asset User Protection Act finally goes into effect. Although Korea has an active virtual asset market, it has been difficult to secure the stability of the virtual asset market due to a lack of clear guidelines or regulations. According to the '2023 Virtual Asset Profit Report by Country' published by Chainalysis (a blockchain data analysis company), Korea's virtual asset investment profit is ranked 8th in the world, but unlike other developed countries such as Singapore and Japan, laws and systems regarding virtual assets are still insufficient.

The Virtual Asset User Protection Act was enacted to protect the rights and interests of virtual asset users and establish a transparent and sound trading order in the virtual asset market by establishing government authority over virtual asset users and obliging them to protect their assets.

So far, Korea has not established the legal nature of virtual assets, so even if unfair trading or unfair speculation of virtual assets occurs, existing laws such as the Capital Markets Act, which regulates securities, have been applied by analogy, resulting in difficulties.

Once the Virtual Asset User Protection Act is implemented, many of the gray areas of virtual assets will be demarcated. The Virtual Asset User Protection Act imposes on virtual asset business operators an obligation to protect virtual asset users' deposits and separate storage of users' virtual assets (so-called cold wallet storage obligations), and provides for punishment of acts of using undisclosed important information and unfair market manipulation.

In particular, the obligation to separate virtual assets was imposed to prevent hacking damage. Hacking of coins occurs frequently, and once hacking occurs, it is not easy to find the hacker and recover the damaged assets. Not only is it technically difficult to track, but hackers are mainly based overseas, so it is not easy to receive international cooperation. Therefore, preventing virtual asset hacking is probably the best option for now.

The use of undisclosed important information and unfair price manipulation are equally prohibited under the Capital Markets Act for securities. However, to date, there has been no conclusion as to whether virtual assets will be considered securities, making it difficult to immediately apply the Capital Markets Act in relation to virtual assets. In many cases, people were indicted, but were found not guilty because there was no provision for punishment. Now, a way has been established to sanction unfair trading practices related to virtual assets by explicitly prohibiting them in the Virtual Asset User Protection Act. This is expected to strengthen the protection of virtual asset users and stabilize the virtual asset market.

Of course, this goes without saying, but even if the Virtual Asset User Protection Act is implemented, there are still legal challenges that need to be resolved. For example, there is the ICO discussion. ICO (Initial Coin Offering) is a type of crowdfunding that raises initial development funds from an unspecified number of investors to create a new cryptocurrency. In September 2017, Korea completely banned ICOs, judging them to be speculation. For reference, the United States, Singapore, and Japan regulate it but allow it, while China, like Korea, completely bans it.

ICOs are not covered by the Virtual Asset User Protection Act, which will soon be implemented. However, as IPOs (Initial Public Offerings) are taking place in the stock market, Bitcoin has been approved as an ETF, and has been adopted as legal tender in El Salvador, virtual assets are establishing themselves as currencies around the world. Therefore, it is impossible for Korea, a ‘coin powerhouse’, to completely ban ICOs forever. We hope that the ICO system will soon be stably established and contribute to the development of a healthy virtual asset market.

Another example concerns the scope of application of the law. The Virtual Asset User Protection Act stipulates that it applies even when an act is performed overseas and the effect is domestic. Although virtual asset operators have businesses overseas, such as Singapore, they often receive investment from domestic investment companies. So, even if it is an overseas company, if it receives investment from a domestic investment company, does that mean that the effect is felt domestically? In this regard, it seems necessary to review various cases and establish universal legal principles.

Meanwhile, it is said that Bitcoin worth 48.2 billion yen (about 420 billion won) was abnormally leaked from Japan in June. It has been confirmed that some Bitcoins managed in offline storage (cold wallet) were hacked while being transferred to online storage (hot wallet). From the user's perspective, even if they are protected by law, they still cannot be careless about damage to virtual assets.

We do not know what direction virtual assets and their regulations will take in the future. There are still a number of legal issues that need to be explored regarding virtual assets. We hope that the implementation of the Virtual Asset User Protection Act will be the first step toward a mature virtual asset market.

 

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