South Korea is one of the most advanced and active countries in the world when it comes to cryptocurrency and blockchain technology. It has a large and vibrant crypto community, with millions of users, investors, and traders, as well as hundreds of startups, exchanges, and service providers. They are also ranked top 10 in terms of crypto adoption and trading by many different sources.

However, South Korea is also a country that faces many challenges and risks in the crypto space, such as hacking, fraud, money laundering, tax evasion, and market manipulation. These issues have prompted the government and the regulators to take a more proactive and stringent approach to crypto regulation, in order to protect the users, the industry, and the society from potential harm.

In March 2023, the National Assembly passed the Virtual Asset User Protection Act, which marked the country’s first step towards creating a legal framework for crypto assets. The act defines virtual assets as digital representations of value that can be traded or transferred electronically, and sets out the basic rights and obligations of the users and the service providers. The act also gives the Financial Services Commission (FSC), the main financial regulator, the authority to oversee and supervise the crypto sector, and to issue detailed rules and guidelines for its implementation.

The FSC has been working on drafting and proposing various rules and regulations to supplement the act, and to address the specific and emerging issues in the crypto space. The latest proposal, which was announced on December 10, 2023, aims to enhance the consumer protection and the transparency of the crypto industry, by imposing new requirements and standards for the virtual asset service providers (VASPs), such as exchanges, wallets, and custodians.

The new rules, which are scheduled to take effect on July 19, 2024, are open for public comment until January 22, 2024. They are based on the following principles and objectives:

• To protect the users’ assets and interests, by requiring the VASPs to segregate the users’ deposits from their own assets, and to hold sufficient reserves in cold wallets, which are offline and more secure than hot wallets, which are online and more vulnerable to hacking. The VASPs must also pay fees to the users for using their deposits, and provide insurance or mutual aid coverage, or a reserve fund, to compensate the users in case of losses or damages.
• To prevent the misuse and abuse of the users’ assets and information, by prohibiting the VASPs from engaging in unfair or fraudulent practices, such as insider trading, price manipulation, false or misleading disclosures, or blocking the users’ withdrawals without justification. The VASPs must also comply with the anti-money laundering and counter-terrorism financing rules, and report any suspicious transactions to the authorities.
• To enhance the transparency and accountability of the VASPs, by requiring them to disclose their ownership structure, business scope, risk management system, and financial statements, and to obtain a license from the FSC. The VASPs must also disclose if they own or hold any crypto assets, and report their transactions and balances to the FSC on a regular basis. The FSC has the power to inspect, audit, and sanction the VASPs for any violations or non-compliance.
• To promote the innovation and development of the crypto industry, by providing a clear and consistent legal framework, and by encouraging the VASPs to adopt the best practices and standards in the global market. The FSC also plans to support the research and education on crypto and blockchain technology, and to foster the cooperation and communication among the stakeholders, including the government, the industry, the academia, and the civil society.

The new rules, however, do not cover some of the emerging and controversial aspects of the crypto space, such as non-fungible tokens (NFTs), decentralized finance (DeFi), and metaverse. NFTs are unique and indivisible digital tokens that represent various forms of digital or physical assets, such as art, music, games, or collectibles. DeFi is a term that refers to the decentralized and peer-to-peer applications and platforms that provide various financial services, such as lending, borrowing, trading, or investing, without intermediaries or central authorities. Metaverse is a term that describes the immersive and interactive virtual worlds that are powered by blockchain and other technologies, such as virtual reality, augmented reality, and artificial intelligence.

These aspects pose new challenges and opportunities for the crypto industry and the society, as they involve complex and novel issues, such as intellectual property rights, data privacy, consumer protection, taxation, governance, and social impact. The FSC has stated that it will monitor and study these aspects, and will consider introducing separate and specific rules and regulations for them in the future, in consultation with the relevant authorities and experts.

In my opinion, the new rules proposed by the FSC are a positive and necessary step for the crypto industry and the society in South Korea, as they aim to provide a more robust and comprehensive regulatory framework that can balance the interests and needs of the users, the service providers, and the regulators. The new rules can also enhance the credibility and legitimacy of the crypto sector, and can foster its growth and innovation, by aligning it with the global standards and trends.

However, I also think that the new rules are not sufficient and perfect, as they still leave some gaps and uncertainties in the crypto space, especially regarding the emerging and dynamic aspects, such as NFTs, DeFi, and metaverse. These aspects require more attention and research, as they have the potential to transform and disrupt various sectors and domains, such as culture, entertainment, education, healthcare, and governance. They also raise new ethical and social questions, such as the ownership, identity, and participation of the users and the creators, and the impact and influence of the virtual and the real worlds.

Therefore, I suggest that the FSC and the other authorities should adopt a more proactive and adaptive approach to crypto regulation, by engaging and consulting with the stakeholders and the experts from the crypto industry, academia, civil society, and international organizations, and by devising a regulatory framework that is based on evidence, research, and consensus. They should also create a conducive and enabling environment for crypto innovation and adoption, by providing legal clarity, certainty, and protection to the users, investors, and businesses, and by fostering a culture of education, awareness, and collaboration.

South Korea has a unique opportunity and potential to become a leader and an innovator in the crypto and the Web3 space, but it also faces a critical choice and a challenge. It can either embrace crypto and Web3 as a catalyst and a partner for growth and development, or it can reject them as a threat and a competitor for control and dominance. The former would open up new horizons and possibilities for South Korea and its people, while the latter would close them off and isolate them from the rest of the world. The choice is clear, but the challenge is not easy. South Korea needs to act fast and act smart, before it is too late.