A significant transformation is expected in the virtual asset industry in 2024 as a number of legislations pertaining to virtual assets are scheduled to be implemented. In light of this, we examine in this newsletter the latest regulatory trends in the virtual asset industry, notably, the implementation of the Act on the Protection of Virtual Asset Users (the “Act”).
The Act will come into effect on July 19, 2024. On December 11, 2023, a pre-announcement regarding the Proposed Enforcement Decree and the Proposed Supervisory Regulation of the Act was made. Financial regulators have been actively preparing for the enforcement of the Act by establishing a new organization and outlining a roadmap for regulatory implementation, among others.
Furthermore, the Korea Financial Intelligence Unit (the “KoFIU”) of the Financial Services Commission (the “FSC”) has outlined in its 2024 Work Plan a commitment to enhance anti-money laundering efforts. It has also proposed amendments to the Act on Reporting and Using Specified Financial Transaction Information (the “Specified Financial Information Act”). More details are provided below:
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Developments Regarding the Act on Protection of Virtual Asset Users
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The Act was enacted on July 18, 2023, and is slated to take effect on July 19, 2024, a year from its promulgation. This first phase of the legislative procedure in establishing a broader framework on virtual assets encompasses provisions that prioritize, among others, (i) the protection of users’ assets, (ii) the regulation of unfair trade practices, and (iii) the authority of financial regulators to exercise supervision and impose sanctions on virtual asset service providers (“VASPs”). For an in-depth understanding of the implications of the Act, please refer to our firm’s previous newsletter (Link), published on July 6, 2023.
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The FSC released a pre-announcement of the Act’s Enforcement Decree and Supervisory Regulations, allowing the public to provide comments from December 11, 2023 to January 22, 2024. This pre-announcement aimed to provide specific details of the Act and allowed various issues raised by industry participants and the academia on the Act to be addressed and reflected in the Enforcement Decree and Supervisory Regulation. The FSC has also expressed its position on key issues under the Act through press releases and Q&As. To delve deeper into these developments, please refer to our newsletter dated December 18, 2023 (Link).
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Before the Act takes effect in July, financial regulators have implemented a supervisory and inspection system for virtual asset business with power equivalent to that authorized to regulate financial institutions. They have also established an effective infrastructure to ensure timely market surveillance and investigation of unfair trade practices. The key details are as follows:
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On January 9, 2024, the Financial Supervisory Service (the “FSS”) took the initiative to create two dedicated departments (i.e., the Virtual Assets Supervision Department and the Virtual Assets Investigation Department) to focus on supervising, inspecting and investigating virtual assets. The Virtual Assets Supervision Department comprises the Supervision Team, the Market Monitoring Team and the Inspection Team. The Virtual Assets Investigation Department consists of the Investigation Planning Team, the Investigation and Analysis Team and the Investigation Team.
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The FSS has released a regulatory implementation roadmap designed to help VASPs comply with the Act. According to this roadmap, VASPs are mandated to undertake various measures prior to the Act’s implementation, including (i) establishing and updating internal regulations, (ii) expanding dedicated personnel and teams, and (iii) integrating efficient IT systems. In order to ensure VASPs’ compliance with the regulations, the FSS has announced that it will extend assistance by providing self-inspection checklists and on-site consulting services and organizing compliance training.
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The FSS has established and operated the “Virtual Asset-Linked Investment Fraud Report Center” as a proactive measure to detect and address illicit activities associated with virtual assets. However, it has recently enhanced this center by renaming it the “Unfair Virtual Asset Trading and Investment Fraud Report Center” on January 30, 2024. The FSS has expressed its commitment to collaborate with law enforcement agencies for the purpose of ensuring a systematic response to reported instances of unfair trading practices. It also added that it is dedicated to promptly identifying such activities and implementing tightened measures accordingly.
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Latest Developments Regarding the Specified Financial Information Act
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On February 8, 2024, the KoFIU announced its “2024 Work Plan.” According to the plan, the KoFIU will (i) shift its focus regarding the oversight and inspection of financial companies from detecting and imposing punishments on violations to encouraging these companies to enhance their anti-money laundering (“AML”) measures, (ii) strengthen the review and AML inspection processes of VASP report filings in order to combat crimes involving the misuse of virtual assets, foster a healthy and sound virtual asset market and safeguard virtual asset service users, (iii) enhance its inspection and analysis capabilities, specifically targeting crimes related to virtual assets and illegal financing, and (iv) significantly strengthen relevant laws and systems to align with international standards to improve the overall AML framework in Korea. The key details relevant to virtual assets are as follows:
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The KoFIU plans to strengthen the VASP report filing requirements to block ineligible service providers from entering the market. The scope of the KoFIU’s review for VASP reports will be expanded to include not just the service providers and their officers but also their major shareholders. Additionally, the scope of laws barring those with previous law violations from entering the market will be expanded, and social credibility requirements will be newly included alongside existing review requirements. Furthermore, to strengthen the review process, relevant systems will be improved through amendments to the Specified Financial Information Act and other applicable regulations.
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Moreover, the KoFIU plans to implement a system to review VASP reports, through which ineligible VASPs may be deregistered. To this end, the KoFIU will comprehensively assess various factors, including the risk of money laundering, VASP’s operational capabilities in the Korean Won-denominated market and measures implemented for user protection when they review any renewal VASP report or a report on changes in a VASP’s management resulting from changes in any major shareholder. To ensure a comprehensive assessment, in anticipation of a significant number of VASP reports to be filed in the second half of 2024, the KoFIU is committed to conducting a preliminary review of VASPs that are expected to file such reports in the first half of 2024 so their formal review exercise may be carried out thoroughly in the second half.
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Furthermore, in the mid to long-term, the KoFIU plans to (i) implement a fund flow analysis and tracking system for virtual asset crimes to enhance its review and analysis techniques, and (ii) explore the option to introduce a “preemptive suspension system for suspicious transactions,” where suspicious transactions can be halted/suspended by the KoFIU before the investigation by the Prosecutors’ Office, thereby promptly detecting crimes and preventing the concealment of criminal proceeds.
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With the implementation of the Act this year, there will be a strong focus on introducing regulations for virtual assets to safeguard users’ assets and regulate unfair transactions involving virtual assets. In addition, efforts will be made to strengthen existing anti-money laundering and market entry/exit regulations under the Specified Financial Information Act. These changes are expected to significantly impact the virtual asset market and industry as a whole. Consequently, it is crucial for participants in the virtual asset market, including VASPs, to thoroughly assess the alignment of their current business structure and direction with the relevant regulations to minimize any legal risks that may arise from non-compliance with these regulations.
[Korean Version]
