On June 30, 2023, the South Korean National Assembly’s Political Affairs Committee passed the country’s first legislation on virtual assets – the “Virtual Asset User Protection Law (가상 자산 이용자 보호 등에 관한 법률안)”, aimed at protecting virtual asset users and restricting unfair transactions. It will take effect one year after promulgation (expected to be implemented from July 2024). The “Virtual Asset User Protection Law” has 20 pages and 22 articles. The complete text of the law is translated below.
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Key points of the law:
A. The purpose of this law is to protect the rights and interests of virtual asset users and establish a sound trading order for the virtual asset market (Article 1).
B. The definition of virtual assets refers to the existing definition of virtual assets in the “Act on Reporting and Using Specific Financial Transaction Information”, but excludes electronic currencies and related services issued by the Bank of Korea, and defines virtual asset markets for virtual asset operators (Article 2).
C. Actions that affect South Korea should be subject to the constraints specified in this law, even if they are implemented overseas. Virtual assets and virtual asset operators should be subject to the constraints specified in this law, unless otherwise provided by other laws (Articles 3 and 4).
D. The Financial Services Commission can establish and operate a committee related to virtual assets to provide advice on policies and systems for virtual asset markets and virtual asset operators (Article 5).
E. In order to protect the assets of virtual asset users, the law stipulates matters related to protecting deposits, storing virtual assets, insurance, and establishing and maintaining records of virtual asset transactions (Articles 6 to 9).
F. Unfair trading behaviors such as using undisclosed material information, manipulating market prices, and fraudulent transactions are defined as unfair trading behaviors in the virtual asset market. If violated, the responsible party should bear the responsibility of compensation for losses and may be fined (Articles 10 and 17, WEEX Wei Ke Note: This is the focus of the entire law).
G. It is forbidden to arbitrarily block users’ access to virtual assets, and virtual currency exchange operators are required to monitor abnormal transactions in the virtual asset market at all times, take appropriate measures, and notify financial regulatory authorities (Articles 1 and 12, WEEX Wei Ke Note: Operating organizations cannot arbitrarily restrict user access and transactions, and should proactively report any abnormalities to regulatory authorities).
H. Specifies the matters for supervisory inspections of virtual asset operators by financial authorities and the authority to investigate unfair trade practices (Articles 13 to 15).
I. Allows the central bank to request virtual asset operators to submit documents when necessary for the execution of monetary and credit policies, financial stability, and the smooth operation of payment and settlement systems (Article 16).
J. Specifies the related matters on punishment and increased punishment for those engaging in unfair trade practices, allows the combining of disqualification and fines in cases of imprisonment, and specifies matters related to confiscation and providing relief from punishment (Articles 19 to 21).
K. Any person who violates the obligations defined in this regulation, except for unfair trade practices, shall be subject to a fine of no more than 100 million won (Article 22).
Virtual Asset User Protection Act
Chapter 1 General Provisions
Article 1 (Purpose) The purpose of this Act is to protect the rights and interests of virtual asset users and to establish transparent and sound trading order in the virtual asset market by establishing measures to protect the assets of virtual asset users and regulate unfair trading activities.
Article 2 (Definitions) The following terms used in this Act shall have the following meanings:
1. “Virtual asset” means an electronic representation with economic value that can be traded or transferred electronically (including any rights therein); provided, however, that it does not include anything that falls under any of the following subparagraphs:
A. Electronic certificates that cannot be exchanged for money, goods, services, etc., or information related thereto, the use of which has been restricted by the issuer
B. Tangible and intangible results obtained through the use of game materials pursuant to Article 32 (1) 7 of the Game Industry Promotion Act
C. Prepaid electronic payment instruments and electronic currencies referred to in Article 2 (14) and (15) of the Electronic Financial Transactions Act, respectively
D. Electronic registration of shares pursuant to Article 2 (4) of the Electronic Registration of Stocks and Bonds Act
E. Electronic bills of exchange pursuant to Article 2 (2) of the Electronic Bill of Exchange Issuance and Distribution Act
F. Electronic bills of lading pursuant to Article 862 of the Commercial Code
G. Electronic currency forms and related services issued by the Bank of Korea pursuant to the Bank of Korea Act
H. Those to be determined by Presidential Decree according to the form and nature of the transaction
2. “Virtual Asset Business” refers to any person engaged in any of the following activities related to virtual assets:
A. The act of selling and purchasing virtual assets (hereinafter referred to as “buying and selling”)
B. The act of exchanging other virtual assets with virtual assets
C. The act of transferring virtual assets in accordance with a presidential decree
D. The act of storing or managing virtual assets
E. The act of acting as an intermediary, arranging, or representing any of the acts listed in A and B
3. “User” means a person who purchases, sells, exchanges, transfers, or stores and manages virtual assets through virtual asset business.
4. “Virtual Asset Market” refers to a market where virtual assets can be bought and sold or exchanged between virtual assets.
Article 3 (Applicable to Foreign Actions) This Act shall also apply to acts performed overseas that have an impact on Korea.
Article 4 (Relation with Other Laws) Unless there are special provisions in other laws, virtual assets and virtual asset operators shall be subject to the jurisdiction of this Act.
Article 5 (Establishment of Virtual Asset Committee) (1) The Financial Services Commission may establish and operate a virtual asset committee to provide advice on policies and systems related to virtual asset markets and virtual asset businesses under this Act or other laws and regulations.
(2) Necessary matters concerning the composition and operation of the committee pursuant to paragraph (1) shall be prescribed by presidential decree.
Chapter 2 Protection of User Assets
Article 6 (Protection of Deposits) (1) A virtual asset business operator shall separate the deposits of users (referring to funds deposited by users for buying and selling virtual assets, intermediary buying and selling, and other business activities) from its own property, and deposit or entrust them to an authoritative institution (hereinafter referred to as the “managing institution”) such as a bank under the method prescribed by presidential decree.
WEEX Note: This article emphasizes that virtual asset operators should separate their own assets from customer deposits, which is the world-recognized and most basic “asset segregation principle.”
Judicial case: In June 2023, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance, alleging in multiple charges that Binance and its U.S. branch transferred more than $12 billion in customer assets to entities controlled by Binance founder Zhao Changpeng (CZ) between 2019 and 2021, including mixing client and company funds in accounts at Merit Peak, a trading company owned by Zhao Changpeng; According to auditor Armanino’s findings, Binance had “significant deficiencies” in operating the BINANCE.US platform and controlling customer assets, including mixing customer and company funds, relying on the parent company for financial data, and lacking disaster preparedness plans.
Article 6 (Deposit of Virtual Assets)
1. When the virtual asset operator receives a deposit from a user, the virtual asset operator shall deposit or entrust the deposit to a management institution pursuant to Presidential Decree. In such cases, the virtual asset operator shall disclose that the deposit is the property of the user.
2. No person may offset or attach the deposit deposited or entrusted pursuant to paragraph 1, and the virtual asset operator that deposited or entrusted the deposit to the management institution may not transfer or provide collateral for the deposit deposited or entrusted to the management institution, unless otherwise provided for by Presidential Decree.
3. If the virtual asset operator falls under any of the following subparagraphs, the management institution shall pay the deposited or entrusted deposit to the user in the manner and procedure prescribed by Presidential Decree upon request of the user:
1. When the business registration is cancelled;
2. In the case of a resolution to dissolve or merge;
3. When declared bankrupt.
Article 7 (Storage of Virtual Assets)
1. When a virtual asset business operator is entrusted with the storage of virtual assets by a user, the virtual asset business operator shall establish and maintain a user registration book that includes the following items:
1. User’s address and name;
2. Type and quantity of virtual assets entrusted by the user;
3. Virtual asset address of the user (referring to a unique identification number generated electronically for the transmission and storage history of managing virtual assets).
2. The virtual asset business operator shall keep its own virtual assets separate from those of its users, and shall actually hold virtual assets of the same type and quantity entrusted by the user.
3. The virtual asset business operator shall store the virtual assets entrusted by the user pursuant to paragraph 1 in a separate, secure manner in accordance with the proportion set by Presidential Decree from the Internet.
4. The virtual asset business operator may entrust the virtual assets of users to an institution that meets the security standards set by Presidential Decree and store them.
Article 8 (Obtaining Insurance, etc.)
In order to fulfill its responsibilities in the event of a Presidential Decree- designated accident such as hacking or computer malfunction, the virtual asset business operator shall take necessary measures such as obtaining insurance or deductible or accumulating reserve funds in accordance with the standards set by the Financial Services Commission (e.g., WEEX Exchange sets up a 1,000 BTC investor protection fund).
Article 9 (Establishment, Retention, and Destruction of Trading Records)
1. The virtual asset business operator shall retain records (hereinafter referred to as “virtual asset trading records”) that can track and query virtual asset trading contents such as buying and selling or confirm and correct errors in transaction contents for 15 years from the date of termination of the transaction relationship.
Article 2 Presidential Decree shall provide for the types of virtual asset transaction records that virtual asset companies should keep, storage methods, destruction procedures and methods, etc.
Chapter III Supervision of Unfair Trade
Article 10 (Prohibition of Unfair Trading Acts, etc.)① A person who falls under any of the following items shall not use undisclosed significant information about virtual assets (meaning information that may have a significant impact on a user’s investment judgment before being disclosed to unspecified persons in accordance with the methods prescribed by Presidential Decree) for the purchase, sale, or other transactions of such virtual assets, nor shall he or she use it by another person.
1. Virtual asset companies, virtual asset issuers (including legal entities, hereinafter simply referred to as “legal entities”), and their employees and agents who know undisclosed significant information in the course of performing their duties
2. Legal entities that know undisclosed significant information in the process of exercising their rights as major shareholders (in this case, “financial companies” should be regarded as “legal entities” according to Article 2, Paragraph 6 of the Financial Company Governance Act)
3. Persons who know undisclosed significant information in the process of exercising their rights
4. Persons who have a license, authorization, guidance, supervision, or other power over virtual asset companies or virtual asset issuers according to laws and regulations, and who know undisclosed significant information in the process of exercising such power; persons who have signed, negotiated, or performed contracts with virtual asset companies or virtual asset issuers and who know undisclosed significant information in the process of signing, negotiating, or performing such contracts
5. Agents (including their employees and agents, if the person is a company) of persons falling under Paragraphs 2 to 4, users, or any other employees (including their employees and agents, if a person falling under Paragraphs 2 to 4 is a company) who are aware of undisclosed significant information in the performance of their duties
6. Persons who have received undisclosed significant information from any person falling under Paragraphs 1 to 5 (including those who have not been one year since they are no longer one of Paragraphs 1 to 5)
7. Any other personnel designated by Presidential Decree
WEEX note: Paragraphs 1-6 define “insiders”, which can refer to the definition of insider information in traditional finance: insiders refer to individuals or entities who have access to undisclosed information within a company or organization and conduct transactions based on this information. This insider information may include important financial data of the company, undisclosed business decisions, merger and acquisition plans, major contracts, product innovations, and other important information related to the company. Insiders can be senior executives, directors, employees, partners or other individuals closely related to the company.
② No one shall engage in the following activities for the prosperity of trading of virtual assets by misleading others, or otherwise causing others to make wrong judgments:
1. Arranging for others to buy and sell virtual assets at the same price while selling them to the parties concerned in advance
2. Arranging for others to sell virtual assets at the same price while buying them at the same time as the parties concerned in advance
3. Conducting false transactions that are not intended to transfer the right to buy and sell virtual assets
WEEX Note: The first two items prohibit insiders from using insider information to profit from trading, i.e., “rat warehouse” behavior; the third item prohibits “brush orders” behavior.
Judicial Case: The aforementioned SEC’s charges against Binance Exchange include: accusing Binance of conducting wash trading on its US platform, which usually leads to artificially high trading volume and creates the illusion of market interest. It is said that most of these transactions were conducted through the affiliated account of Sigma Chain owned and controlled by Zhao Changpeng, i.e., the “brush orders” behavior prohibited by the third item above.
4. Entrusting and acting as agents for the aforementioned 1 to 3 items
③ No one shall falsely make the trading of virtual assets look prosperous or engage in buying and selling or entrusting or commissioning activities of fluctuating or fixed virtual asset market prices to attract the trading of virtual assets.
④ No one shall engage in any of the following activities related to the purchase, sale, or other transactions of virtual assets:
1. Using fraud, plans, or technology
2. Making false statements or representations about material matters, or using documents or other statements or representations that omit necessary material facts so as not to mislead others, to gain economic or other property benefits
3. Using false market prices to induce the purchase or sale of virtual assets or other transactions
4. Entrusting or commissioning the aforementioned 1 to 3 items
⑤ Virtual asset enterprises shall not engage in the sale, purchase, or other transactions of virtual assets issued by themselves or by persons with special relationships as prescribed by presidential decree (hereinafter referred to as “related parties”) unless they belong to any of the following categories:
1. It is a virtual asset issued as a payment method for specific goods or services. The operator of the virtual asset provides the users with specific goods and services as promised and obtains the virtual asset as a return.
2. When the virtual asset provider unavoidably acquires the virtual asset due to the characteristics of the virtual asset and follows the procedures and methods prescribed by the Presidential Decree to prevent unfair trade practices or conflicts of interest with users.
6. Those who violate the provisions of Article 1 to Article 5 shall be liable for compensation for the losses suffered by users due to violations when purchasing, selling or otherwise trading virtual assets.
Article 11 (Prohibition of arbitrarily blocking the deposit and withdrawal of virtual assets) ① Without a legitimate reason prescribed by the Presidential Decree, the virtual asset business shall not block users from depositing or withdrawing virtual assets (WEEX Note: Users shall not be arbitrarily restricted from depositing and withdrawing funds or trading).
② If the operator of the virtual asset business prevents users from depositing or withdrawing virtual assets, it shall notify users of the reasons in advance and immediately report this fact to the Financial Services Commission.
③ Those who violate the provisions of paragraph ① shall compensate the person who has conducted virtual asset transactions or entrusted transactions for the loss suffered based on the transaction or entrusted price formed due to the violation of the provisions.
④ If the right to claim compensation under paragraph ③ is not exercised by the claimant within two years after knowing the act of violating paragraph ① or within five years after the occurrence of the act, it shall become invalid due to the statute of limitations of the lawsuit. (WEEX Note: The statute of limitations for the lawsuit is up to 5 years.)
Article 12 (Monitoring abnormal transactions) ① The operator of the virtual asset market that opens and operates the virtual asset market shall monitor abnormal transactions prescribed by the Presidential Decree (hereinafter referred to as “abnormal transactions”), such as transactions in which the price or volume of virtual assets fluctuate abnormally, and take appropriate measures prescribed by the Financial Services Commission to protect users and maintain a good trading order.
② If the virtual asset operator specified in paragraph ① suspects a violation of Article 10, it shall promptly notify the head of the Financial Services Commission and the Financial Supervisory Authority (hereinafter referred to as “Financial Services Commission”) established under Article 24, paragraph 1 of the Financial Services Commission Establishment Act. However, in cases where the Financial Services Commission has prescribed and notified, such as when the suspicion of violating Article 10 is sufficiently confirmed, the party shall promptly report to the investigating agency and report the fact to the head of the Financial Services Commission and the financial supervisory authority.
Article 17 (Punishment for unfair trading practices) (1) The Financial Services Commission may impose a penalty of up to twice the profit (including unrealized profit, hereinafter referred to as “this Article”) obtained from the illegal act or the amount of loss avoided due to the illegal act on a person who violates the provisions of paragraphs (1) to (4) of Article 10. If there is no profit obtained from a transaction related to the illegal act or the amount of loss avoided due to the illegal act, or if it is difficult to calculate, a fine of up to KRW 4 billion (WEEX Note: Approximately USD 3.073 million) may be imposed.
(2) When imposing a fine according to paragraph (1), if the same offense is committed pursuant to Article 19, the Financial Services Commission may cancel the penalty imposed pursuant to paragraph (1) or exclude the entire or part of the amount equivalent to that penalty from the penalty (including any confiscated or recovered amount).
(3) If the Financial Services Commission requests the submission of materials related to an investigation for the purpose of imposing a penalty pursuant to paragraph (1), the Prosecutor General may provide such materials to the extent deemed necessary.
(4) The provisions of Articles 431 to 434 and Articles 434(2) to 434(4) of the Capital Market and Financial Investment Business Act shall apply to the submission of opinions on the payment of fines, appeals, extension of payment deadlines, collection of fines and processing of debts, refund of overpayments, calculation of refund values and handling of defects, in connection with fines.
(5) Matters necessary for the procedures and standards for implementing penalties other than those provided in paragraphs (1) to (4) shall be prescribed by Presidential Decree.
Article 18 (Authorization) The Financial Services Commission may delegate any part of its duties under this Act to the Director of the Financial Supervisory Service in accordance with the Presidential Decree.
Chapter 5 Penalties
Article 19 (Criminal Penalties) (1) A person who falls under any of the following subparagraphs shall be punished by imprisonment with labor for not less than one year or a fine of not less than three times but not more than five times the profit obtained from the crime or the amount of loss avoided, whichever is greater. However, if the amount equivalent to five times the profit obtained from or loss avoided due to the crime is less than KRW 500 million, the upper limit of the fine shall be KRW 500 million (WEEX Note: Approximately USD 38.4 thousand).
1. a person who newly issues assets that use or may cause others to use undisclosed material information related to virtual assets for purchase, sale, or other transactions in violation of paragraph (1) of Article 10;
2. Violating Article 10, paragraph (2), engaging in behavior that belongs to any of the same item in order to mislead others to purchase or sell the nature of virtual assets, or in other ways causing others to make erroneous judgments;
3. Violating Article 10, paragraph (3), engaging in the sale or consignment of virtual assets, or floating or fixed market prices of virtual assets, with the aim of attracting the sale or purchase of virtual assets, misleadingly making people think that the sale or purchase is prosperous;
4. Those who engage in any of the behaviors related to the purchase and sale of virtual assets or other transactions listed in Article 10, paragraph (4).
WEEX唯客 (weex.com) summary: Insider information insiders conduct insider trading, “brush order” false transactions, manipulate prices, and use various means to defraud, and are subject to imprisonment for more than one year or a fine of 3-5 times the profit amount, or a maximum of 500 million won fine.
② Those who violate the provisions of Article 10, paragraph (5) and engage in the purchase and sale of virtual assets issued by themselves or affiliates shall be sentenced to imprisonment not exceeding 10 years or a fine of 3 times to 5 times the profit amount or the avoided loss amount due to the crime. However, if it is difficult to obtain or calculate the profits obtained or losses avoided due to the crime, or the amount equivalent to 5 times the profits obtained or losses avoided due to the crime is less than 500 million won, the upper limit of the fine shall be 500 million won.
WEEX唯客 summary: Those who engage in related party transactions shall be imprisoned for up to 10 years or fined 3-5 times the profit amount, or a maximum fine of 500 million won.
③ If the profit or loss avoided amount obtained due to the violation of paragraph (1) exceeds 500 million won, the imprisonment prescribed in paragraph (1) shall be aggravated in accordance with the following items:
1. If the profit or loss avoided amount exceeds 50 billion won: life imprisonment or imprisonment for more than 5 years (WEEX唯客 note: If the insider trading profit amount exceeds 50 billion won, the maximum sentence is life imprisonment);
2. If the profit or loss avoided amount exceeds 500 million won but is less than 50 billion won: imprisonment for more than 3 years.
④ If the profit or loss avoided amount obtained due to the violation of paragraph (2) is 500 million won or more, the imprisonment prescribed in paragraph (2) shall be aggravated in accordance with the following items:
1. If the profit or loss avoided is KRW 5 billion or more: imprisonment for 3 years or more (WEEX Note: For false transactions with profits exceeding KRW 5 billion, a sentence of 3 years or more imprisonment is imposed)
2. If the profit or loss avoided exceeds KRW 500 million, but is less than KRW 5 billion: fixed-term imprisonment of not less than 2 years
⑤ In the case of imprisonment provided in subparagraphs ① to ④, cancellation of qualifications shall not exceed 10 years, and fines may be combined.
⑥ The profit (including unrealized profit) or loss avoided in violation of subparagraphs ① and ② shall be the difference between the total income generated by the transaction through the violation behavior and the total cost of the transaction (WEEX Note: calculated based on the amount of illegal profit/loss avoided, rather than the amount involved. That is, if insider trading results in a loss, the circumstances will be mitigated). In this case, the specific calculation method for each type of crime shall be determined by presidential decree.
Article 20 (Confiscation and Seizure)① Property acquired by a person falling under subparagraph ① or ② of Article 19 shall be confiscated, and if it cannot be confiscated, its value shall be seized. Property provided or attempted to be provided by a person falling under subparagraphs ② to ④ of Article 19 and subparagraph 2 shall be confiscated, and if it cannot be confiscated, its value shall be collected.
Article 21 (Punishment) If the representative of a legal entity (including an organization, hereinafter the same shall apply) or an agent, user, or other employee of a legal entity or individual violates the provisions of Article 19 in the affairs of the legal entity or individual, in addition to punishing the perpetrator, a fine shall also be imposed on the legal entity or individual in accordance with this Article. However, this does not apply if the legal entity or individual has taken appropriate attention and supervision of the affairs of the legal entity or individual to prevent the occurrence of a crime.
WEEX Note: If an employee commits a crime, the company will also be punished, but if the company makes efforts to supervise and prevent illegal crimes in advance, it can be exempted.
Article 22 (Fine)① A fine of not more than KRW 100 million (WEEX Note: approximately USD 77,000) shall be imposed on a person falling under any of the following items:
1. Those who illegally manage user deposits in violation of Article 6
2. Those who illegally store user virtual assets in violation of Article 7
3. Those who do not take necessary measures such as obtaining insurance or deductible or accumulating reserve funds in violation of Article 8
4. Violating Article 9 by failing to establish, retain, or destroy records of virtual asset transactions
5. Failing to report or submitting a false report pursuant to Article 11 (2)
6. Violating Article 12 (1) by failing to take appropriate measures for abnormal transactions
7. Failing to notify or report pursuant to Article 12 (2) or submitting a false report
8. Failing to comply with, or refusing, obstructing, or evading inspections, investigations, orders, or requests pursuant to Articles 13 through 15
2. The penalty under paragraph (1) shall be imposed and collected by the Financial Services Commission in the manner and procedure prescribed by Presidential Decree.
Article 1 (Effective Date) This Act shall enter into force one year after its promulgation (WEEX Note: expected to be implemented from July 2024).
Article 2 (Amendment of Other Acts) (omitted)