Crypto exchanges in South Korea now required to hold 80% of assets in cold storage

South Korea’s first major cryptocurrency regulations have come into effect to protect crypto investors in the country.

The new framework introduces strict requirements for Virtual Asset Service Providers (VASPs). Dubbed Protection of Virtual Asset Users (PVAU), the framework requires VASPs to keep at least 80% of users’ digital assets in cold storage.

The Financial Services Commission (FSC) will designate trusted financial institutions to manage fiat deposits made to VASPs. Additionally, VASPs must segregate client funds from VASP funds and invest them in “risk-free” assets to generate returns.

This assurance ensures that in the event of a cryptocurrency exchange going bankrupt, the relevant financial institutions will directly reimburse customer funds.

These measures are a direct response to the collapses of Terra-Luna and FTX, which wiped out billions of dollars worth of customer funds. The collapse of both organizations hit South Korea hard, especially FTX, where over 6% of its traffic came from the East Asian country.

In addition to the requirements outlined above, VASPs are also required to be insured or maintain a reserve fund to mitigate losses in the event of a potential attack or liquidity crisis.

The law also includes provisions for VASPs to restrict users’ deposits and withdrawals under certain conditions, thus providing greater control over irregular activities.

The Financial Supervisory Service (FSS), the FSC’s enforcement arm, has also established a real-time monitoring system in collaboration with cryptocurrency exchanges to “continuously monitor abnormal transactions.” The system was also scheduled to be implemented on July 19, along with the User Protection Law.

The regulator claims that this system will cover 99.9% of the country’s crypto trading volume. If any anomalies are detected, they must be reported to the FSS via a dedicated data transmission line.

When the system was introduced at the beginning of July, 29 cryptocurrency exchanges, including Upbit, Bithumb, Coinone, Korbit and Gopax, had registered with the FSS on this issue.

The latest implementation comes after South Korea’s Ministry of Economy and Finance postponed a 20% crypto profits tax that was set to be implemented early next year. The country’s ruling party is reportedly considering postponing it to 2028.