One of the cornerstones of the new regulations is the cold storage obligation. Virtual Asset Service Providers (VASPs), just like traditional banks, must keep at least 80% of their customers’ digital assets in cold wallets without internet access.

In this way, additional protection is provided against cyber attacks. It is aimed to prevent millions of dollars of losses due to hacking.

New regulations do not only provide protection against cyber attacks. The Financial Services Commission (FSC) requires fiat investments in VASPs to be managed through trusted financial institutions. Thus, as in traditional banking, investor funds are kept separate from VASPs’ own funds.

Additionally, VASPs are required to earn returns by investing client funds in “risk-free” assets. This ensures the safety of customer funds even if a VASP goes bankrupt.

One of the main factors behind the tightening of new regulations is the recent major cryptocurrency crashes. The collapse of the Terra-Luna and FTX exchanges destroyed billions of dollars of investor funds. These events also deeply affected South Korea.

Notably, more than 6% of FTX’s user traffic came from South Korea. This incident demonstrated the importance and urgency of cryptocurrency regulations.

In addition to cold storage and financial stability, the new regulations aim to protect investors from other risks. VASPs are required to be insured or maintain a reserve fund. In this way, investors’ losses are tried to be minimized in unforeseen situations such as hacking or liquidity crises.

In addition, VASPs are also given the authority to restrict users’ deposits and withdrawals under certain conditions to prevent suspicious money movements. In this way, it is aimed to combat crimes such as money laundering and fraud.

One of the most innovative aspects of the new regulations is the real-time monitoring system. The Financial Supervisory Service (FSS) implemented this system in cooperation with cryptocurrency exchanges to detect abnormal transactions. The system is designed to cover 99.9% of the cryptocurrency trading volume in the country.

As soon as suspicious transactions are detected, they are transmitted to the FSS via a special data line. This creates the opportunity to immediately intervene in negative developments in the market.

The fact that 29 cryptocurrency exchanges have signed up to the real-time monitoring system introduced at the beginning of July shows the willingness of market participants to comply with the new regulations. The registration of leading exchanges such as Upbit, Bithumb, Coinone, Korbit and Gopax into the system strengthens the possibility of the regulations gaining general acceptance in the market.

While the new regulations come into force, the 20% cryptocurrency earnings tax, which the South Korean Ministry of Economy and Finance planned to implement at the beginning of 2023, has been postponed. The country’s ruling party is seriously considering postponing taxation to 2028. This decision is intended to support market growth by encouraging cryptocurrency investments and reduce investors’ concerns about new regulations.

As a result, South Korea is trying to balance the cryptocurrency market with innovative solutions and strict regulations. These comprehensive regulations aim to increase investor confidence, ensure market stability and prevent future crises.

The global cryptocurrency market is closely following these pioneering steps of South Korea. The success of these regulations may lead other countries to implement similar practices.