South Korean Crypto Exchanges Mandated to Store 80 of Assets in Cold Storage
South Korea has officially implemented its first major cryptocurrency regulations to protect investors in the country. Known as the Protection of Virtual Asset Users (PVAU), the new framework imposes strict requirements on Virtual Asset Service Providers (VASPs). Under the regulations, VASPs must keep at least 80% of users’ digital assets in cold storage. The Financial Services Commission (FSC) will select reliable financial institutions to handle fiat deposits made by VASPs. Additionally, VASPs are required to separate customer funds from their own and invest them in risk-free assets to generate a yield. This measure ensures that if a cryptocurrency exchange were to go bankrupt, the corresponding financial institutions would directly reimburse customer funds. The regulations were introduced in response to the collapse of Terra-Luna and FTX, which resulted in the loss of billions of dollars in customer funds. These incidents had a significant impact on South Korea, with FTX alone receiving more than 6% of its traffic from the country. In addition to these mandates, VASPs must also have insurance or a reserve fund in place to mitigate potential damages caused by hacks or liquidity crises. The new law also grants VASPs the authority to restrict user deposits and withdrawals under specific conditions, giving them further control over irregular activities. The Financial Supervisory Service (FSS), the executive branch of the FSC, has partnered with cryptocurrency exchanges to establish a real-time monitoring system to track abnormal transactions. This system, which covers 99.9% of the country’s crypto trading volume, requires any identified abnormalities to be reported to the FSS through a dedicated data transmission line. In early July, 29 crypto exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, registered with the FSS to participate in this system. The implementation of these regulations follows the postponement of the 20% crypto gains tax by South Korea’s Ministry of Economy and Finance. The ruling party is reportedly considering delaying its implementation until 2028.
