- South Korea has made it mandatory for defunct cryptocurrency exchanges to obtain insurance to protect user assets.
- The Virtual Asset User Protection Act imposes strict measures on the operation of cryptocurrency exchanges.
- Failure to comply with South Korea’s encryption rules could result in fines or service suspension.
South Korea’s Financial Supervisory Service (FSS) now requires defunct cryptocurrency exchanges to purchase insurance to protect user assets. The measure is part of a broader move to strengthen investor protection following the recent implementation of the Virtual Asset User Protection Act, South Korea’s first comprehensive regulatory framework for the cryptocurrency industry.
The new insurance rules are designed to protect assets held by bankrupt exchanges and mitigate the risk of potential hacking incidents. Several closed exchanges, including GDAC and Hanbitco, have already obtained insurance coverage.
Huobi Korea, another major exchange, is reportedly considering similar measures to meet this regulatory requirement. The insurance provision directly implements the Virtual Asset User Protection Act, ensuring that users’ funds are protected even after the exchange is closed.
The Virtual Asset User Protection Act, passed on July 2024, 7, introduced strict regulations to improve investor security and curb unfair trading practices. Under this legislation, South Korean cryptocurrency trading platforms must segregate at least 18% of customer funds in cold storage solutions, separate from the exchange’s operating funds.
Additionally, exchanges must accept cash deposits from users at local licensed banks and maintain cryptocurrency reserves that match the type and amount of customer deposits.
The bill also requires crypto services to purchase adequate insurance or establish reserve funds to cover potential losses from hacking attacks or liquidity crises. These measures are intended to ensure that exchanges have the financial resources to compensate users in the event of unforeseen events.
The Virtual Asset User Protection Act stipulates severe penalties for non-compliance. Cryptocurrency exchanges that fail to comply with these new regulations could face heavy fines or suspension of services from the Financial Services Commission (FSC).
In addition, the bill also stipulates that those who participate in market manipulation will face severe penalties. Individuals who spread false information, manipulate prices, or use insider information for personal gain may face huge fines or even be sentenced to prison.