Authorities Take First Step Before July Virtual Asset Act Enforcement... Industry on Edge

Ahead of the enforcement of the "Virtual Asset User Protection Act (Virtual Asset Act)" scheduled for July this year, financial supervisory authorities have begun on-site consulting with individual exchanges in the form of one-on-one coaching. The Financial Supervisory Service (FSS) is expected to focus on inspecting whether abnormal transaction detection systems have been established to counter stock manipulation and price manipulation within the virtual asset market. Since a large-scale renewal filing for virtual asset exchanges is scheduled from September, the virtual asset industry is also putting its life on the line for "investor protection" and "regulatory compliance."

According to the government and the virtual asset industry on the 27th, the FSS started on-site consulting targeting major virtual asset exchanges from the 21st. The targets include five KRW market operators (Upbit, Bithumb, Coinone, Korbit, and GOPAX) and 14 coin market operators. The authorities plan to mainly review the status of abnormal transaction monitoring systems related to unfair trading, as well as the management status of user deposits and virtual assets. On the 11th of next month, a business briefing session explaining the one-year plan will also be held. While continuously sharing the overall direction in line with the law's enforcement, detailed inspections of individual companies will be conducted simultaneously.

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The FSS plans to conduct inspections based on the Virtual Asset Act. Article 12 of the Virtual Asset Act introduces obligations such as monitoring abnormal transactions. This means that virtual asset exchanges must establish systems capable of prohibiting acts related to virtual assets such as △insider trading using undisclosed important information, △price manipulation, and △fraudulent transactions. This is clearly distinct from the anti-money laundering (AML), suspicious transaction reporting (STR), and fraud detection system (FDS) that the Financial Intelligence Unit (FIU) under the Financial Services Commission has been overseeing under the Act on Reporting and Using Specified Financial Transaction Information (Special Financial Transactions Act). The law also specifies obligations for virtual asset operators regarding deposit management, virtual asset custody, and transaction record retention.

A senior official from the FSS stated, "Various regulations have been created under the Virtual Asset User Protection Act, and we intend to check if there are any difficulties in preparation and request improvements," adding, "Some companies confuse the abnormal transaction monitoring system with the FDS under the Special Financial Transactions Act, but it means that a separate monitoring system must be established to detect unfair trading activities such as collusive trading, stock manipulation, price manipulation, and spoofing orders within the virtual asset market, similar to the stock market."

It is also necessary to conduct a reality check on virtual asset deposit services that will effectively be phased out with the enforcement of the Virtual Asset Act in July. After the law takes effect, virtual asset deposit and management businesses will be effectively prohibited. Article 7, Paragraph 2 of the law states that "virtual asset operators must substantially hold virtual assets of the same kind and quantity as those entrusted by users." Since virtual asset operators must directly hold 100% of the assets, the method of entrusting user assets to third parties for management becomes illegal. Examples include Delio, which entrusted coins to other companies such as Haru Invest. GOPAX, a virtual asset exchange, also suspended principal and interest payments on its virtual asset deposit service product "GoFi," resulting in about 2,900 victims. GoFi had entrusted funds to Genesis Capital, a U.S. virtual asset management company. However, due to the bankruptcy of FTX, the world's third-largest virtual asset exchange in 2022, Genesis faced liquidity shortages and other issues, suffering a backlash. As virtual asset prices rose from early last year, the value of deposited virtual assets increased, and the total damage amount is reported to be close to 100 billion KRW.

The virtual asset industry expects that the results of the authorities' preliminary inspections will directly or indirectly affect the renewal outcomes in the second half of this year. It is anticipated that the FSS and FIU will communicate closely internally. Exchanges must file new reports every three years, and this year, many renewals are concentrated in September and October. The FIU plans to strengthen reporting reviews and AML inspections to block unqualified virtual asset exchanges from entering the KRW market and to expel unqualified exchanges already in the market. Major virtual asset exchanges have also adopted "investor protection" and "regulatory compliance" as key themes this year. Some have conducted related training for all employees or strengthened internal financial controls.

Professor Hwang Seok-jin of Dongguk University Graduate School of International Information Security, an advisor to the Digital Asset Exchange Joint Council (DAXA), said, "The industry is waiting for concrete guidelines from the authorities to judge abnormal and unfair transactions," adding, "Since there are multiple exchanges and coins are often listed only in the U.S. or only in Korea by region, it seems unlikely that a uniform law application like securities will be easy."

Meanwhile, the FSS plans to discuss with the industry and related organizations to specifically present criteria for detecting abnormal transactions and standards for reviewing unfair trading suspicions. A mid-term announcement to clarify types of unfair trading acts is also planned before the enforcement of the Virtual Asset Act in July.

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