South Korea's Virtual Asset User Protection Act: Banks must pay interest on their fiat currencies, Upbit earns an extra 50 billion won a year; rumors of large-scale token delistings continue, causing market panic

Recently, rumors of a large-scale token delisting in South Korea have raised concerns. These concerns are related to the Virtual Asset User Protection Act, which is set to take effect on July 19. The bill aims to strengthen user protection and market stability.

Token delisting triggers market panic

Online rumors have claimed that South Korean regulators have notified nearly 30 registered exchanges to review more than 600 listed cryptocurrencies, which could lead to the delisting of 16 tokens. This has led to a sharp drop in the prices of related tokens.

However, on June 18, the Financial Services Commission (FSC) clarified that they would not directly inspect cryptocurrencies listed on exchanges, indicating that the industry will self-regulate.

On July 4, the Financial Supervisory Service (FSS) announced the establishment of a 24-hour monitoring system to detect abnormal cryptocurrency trading activities. Exchanges are advised to enter data into the system to comply with the new law.

Indicators to watch include volume and price deviations, excessive trading volume, and unusually slow execution speeds. The move is part of a broader regulatory effort to identify accounts associated with suspicious activities.

DAXA’s six-month reassessment

On July 2, the Digital Asset Exchange Alliance (DAXA), which consists of five major South Korean cryptocurrency exchanges, launched a six-month reassessment of 1,333 digital assets. The move is in line with the Virtual Asset User Protection Act and involves self-regulation based on expert opinions.

Under the plan, exchanges such as Upbit, Gopax, and Bithumb will review listed tokens to ensure compliance with the new regulations. This process will serve as a benchmark for future token listings.

For overseas assets, DAXA plans to develop a flexible “alternative review program” to relax the conditions for trading assets on qualified foreign exchange exchanges for more than two years.

Key provisions of the new law

The Virtual Asset User Protection Act defines and excludes certain virtual assets and requires virtual asset operators to safely manage user deposits. Highlights include:

• Excluding CBDCs issued by the Bank of Korea from the definition of virtual assets.

• Separating user deposits from operator assets and mandating cold wallets to store more than 80% of user funds.

• Participating in insurance programs to cover potential losses caused by security breaches.

• Monitor and report unusual transactions to financial institutions.

The bill also establishes a virtual asset committee to oversee market order and user protection, with 12 employees on a temporary basis.

South Korea's cryptocurrency market is growing in importance. In the first quarter of 2024, the won became the most actively traded currency in crypto globally, surpassing the U.S. dollar. The surge is partly attributed to the ongoing fee war between exchanges such as Bithumb and Korbit.

The new legislation is seen as a key step in strengthening the market. Despite concerns about potential short-term liquidity impacts, experts believe the law will enhance market stability and promote innovation.

Former Seoul prosecutor Kim Myung-woon noted that the growing scale of crypto transactions has led to an increase in crime, highlighting the need for specific regulations to effectively address these issues.

South Korea's Virtual Asset User Protection Act: Bank Deposit Interest Payments and Market Impact

The South Korean Virtual Asset User Protection Act, passed in June last year, aims to strengthen investor protection by integrating 19 relevant laws and defining digital assets. The law includes penalties for illegal activities such as the use of non-public information, market manipulation, and unfair trading. It will take effect on July 19, 2024.

Interest Payments on Bank Deposits

A key provision of the bill requires banks to pay interest on fiat currency deposits entrusted by virtual asset exchanges. This could severely impact the profitability of banks, especially banks like K-Bank, which handles a large number of deposits from Upbit, South Korea's largest virtual asset exchange.

K-Bank currently holds 5 trillion won (about $3.6 billion) in deposits from Upbit, which accounts for more than 20% of its total customer balances. Under the new law, if the interest rate is set at 1% (similar to the rate currently paid by Korean securities firms), K-Bank will need to pay about 50 billion won (about $36 million) in interest each year. This amount is almost equivalent to K-Bank's net profit in the first quarter of this year.

K-Bank is also preparing for an IPO, and the new law may affect its valuation. Upbit's large user base has led to a large amount of virtual asset deposits at K-Bank, which other Korean banks do not have.

While banks may conduct financial operations with entrusted cash under the new law, whether this will bring them profits remains to be seen. More information is needed to clarify the financial viability of banks under the regulation.

The Virtual Asset User Protection Law aims to create a safer and more stable market for virtual assets. By implementing strict deposit management, storage, and transaction monitoring regulations, the law aims to prevent fraudulent activities and protect investors from significant losses.

Banks, especially those heavily involved in virtual asset deposits, will face new challenges. The requirement to pay interest on these deposits may affect their profitability. Banks need to find ways to manage these funds efficiently to mitigate the financial impact.

Despite potential short-term challenges, industry experts are optimistic about the long-term benefits of the new regulations. Enhanced market stability and investor protection measures are expected to promote a more robust and transparent virtual asset market, which could drive innovation and growth.