The following bills, which are designed for user protection and fair trade in the digital asset industry, were proposed at the National Assembly in October and November 2022 (the “Bills”): (i) the “Proposed Act on the Restoration of Fairness in the Digital Asset Market and the Creation of Safe Trading Environment” and (ii) the “Proposed Act on the Regulation of Unfair Trade in Virtual Assets.”
The Bills prioritize introducing user protection measures and unfair trade regulations with respect to digital assets – in alignment with global regulations from, among others, the US and the EU. With a growing number of cases where users suffer losses from unfair trade or instability in the digital assets market, the objective of the Bills is to mitigate such side effects first as the discussions around enacting the new Framework Act on Digital Assets have continued.
Some key terms of the Bills are as follows:
1. Scope of Applicability
While the Bills use different terms (i.e., digital assets or virtual assets), they both refer to “virtual assets” and “virtual asset service providers” as defined in the Act on Reporting and Using Specified Financial Transaction Information (the “Specified Financial Information Act”). However, the “Proposed Act on the Restoration of Fairness in the Digital Asset Market and the Creation of Safe Trading Environment” explicitly includes non-fungible tokens (“NFTs”) in the scope of its applicability.
2. User Protection
A digital asset business operator or a virtual asset business operator (the “Operator”) shall entrust any assets deposited by its users with a third-party agency (such as a bank) separately from the Operator’s proprietary assets.
The Operator must store its own digital assets separately from those of its users. The Operator must also maintain the same type and quantity of digital assets entrusted by its users and safeguard at least a certain percentage of such digital assets offline.
The Operator must have insurances or accumulate reserves in preparation for any accidents, including hacking, computer failures, etc.
3. Prohibition of Unfair Trade
Any person who becomes aware of any material non-public information as a result of performing his/her duties or exercising his/her rights as a shareholder shall not use such information to trade digital assets or allow any other person to use such information to trade digital assets.
No person shall engage in any act of conspiring in advance and trading digital assets with the intent to induce others to trade, any act of trading falsely, any act of misleading users into believing that the relevant digital assets are actively traded, or any act of trading that would change or fix the market price.
No person shall engage in any unfair trading practices, such as using unfair means, schemes, or tricks, or falsely describing or representing material facts, in connection with digital asset transactions.
No Operator shall engage in the trading of digital assets issued by itself or any of its related parties.
The Operator shall constantly monitor abnormal transactions and take appropriate measures to protect users and maintain a sound transaction order.
If either Bill is enacted, it would have a significant impact on the trading patterns of the digital assets industry. In particular, given the similarities with the regulations on unfair trading under the Financial Investment Services and Capital Markets Act (the “FSCMA”) with respect to securities, the digital asset industry is likely to become more strictly regulated.
This content is also available in Kim & Chang’s Korea Legal Insight 2023(link), where you can find out more updates and outlooks on Korea’s legal developments in 2023.