New legislation to protect cryptocurrency exchange users faces mixed reactions

New legislation to protect cryptocurrency exchange users faces mixed reactions

South Korea’s Financial Services Commission (FSC) introduced new legislation last week to bolster state-led oversight of the local cryptocurrency sector and enhance user protection despite concerns among industry leaders.

While South Korea’s burgeoning cryptocurrency market attracts increasing interest from global blockchain enterprises, recent high-profile incidents such as the collapse of Terra — a South Korean-led blockchain platform — point to the continued lack of centralized measures to safeguard the users’ assets.

The South Korean government’s pledge to improve its regulatory framework by enacting the Act on the Protection of Virtual Asset Users is, in part, a response to such concerns.

However, experts told Korea Pro that the country’s new legal measure comes with a significant risk, contradicting the fundamental allure of the cryptocurrency market — decentralization.

THE NEW LAW

Scheduled to take effect from July 19, after being passed by the National Assembly last June, the primary aim of the Act on the Protection of Virtual Asset Users is to oversee and protect participants in the burgeoning virtual assets market.

The law’s core objective is to protect individuals engaged in various activities within this domain, including trading, exchanging, transferring, storing, or managing virtual assets. Essentially, it serves as a regulatory framework designed to uphold the integrity of cryptocurrency transactions while prioritizing the security of users’ assets.

Under the legislation, virtual assets are defined as “electronic proofs” — assets that possess economic value and are tradable or transferable electronically. The law also delineates entities excluded from virtual assets, such as in-game currencies, and imposes obligations on virtual asset service providers (VASPs) to manage users’ deposits and assets securely.

In particular, regulations mandate that a significant portion of user assets must be stored in secure offline storage — known as cold wallets — to mitigate the risk of hacking and security breaches.

It also establishes criteria for insurance coverage or reserve fund accumulation to address risks stemming from hacking or system failures, stating that companies must have insurance or reserves to compensate users. The amount of insurance coverage required depends on the value of assets the company holds.

To address issues concerning the disclosure of vital information, insider trading, and the blocking of user assets, the legislation prohibits unjustifiable blocking of user deposits and assets, mandating crypto exchanges monitor abnormal transactions and impose severe fines for unfair trading practices.

Oh-hoon Kwon, a representative attorney at Cha & Kwon, told Korea Pro that the new act will still apply to fraudulent activities overseas if their effects are felt domestically.

“This means that foreign VASPs conducting business targeting Korea are also subject to this act,” Kwon said.

The new legislation follows the implementation of a similar law on regulating uniformity for crypto-assets in the European Union, enacted last June.

However, Kwon noted to Korea Pro that Seoul’s new law on crypto exchanges differs from the EU’s Markets in Crypto-Assets Regulations (MiCA) law in that MiCA has a broader target scope, regulating various aspects of crypto-assets across different operational domains while Seoul’s new legislation is more narrowly tailored, specifically targeting activities within virtual asset exchanges.

RECENT CONTROVERSIES

The act was prompted by a significant industry shakeup involving Terraform Labs, the start-up behind Terra, a blockchain protocol and payments platform, and its founder, Do Kwon.

Terra blockchain specialized in algorithmic stablecoins, which are cryptocurrencies backed by reserve assets such as fiat currencies like the U.S. dollar and aim to maintain a 1:1 peg with the underlying currency.

However, terraUSD (UST), instead of being backed directly by fiat currency reserves, relied on algorithmic equations and its sister cryptocurrency, LUNA, to stabilize its supply and demand, thereby maintaining its value at $1 as it fluctuated alongside the U.S. dollar.

Before its crash, Terra had gained significant attention within the crypto community. However, in May 2022, concerns about Do Kwon’s alleged involvement in illicit activities and questionable business practices emerged, triggering a sell-off of UST and LUNA tokens.

This also caused UST to “de-peg” from the dollar, meaning its value was no longer fixed at $1 and fluctuated independently. Consequently, both cryptocurrencies experienced a collapse in value.

Thousands of investors lost over $400 billion in investments, highlighting the necessity for transparency, accountability and regulatory compliance in the virtual asset market and prompting governments to forge newer regulations to protect against such incidents.

Edward Dhong, a senior foreign attorney at Yoon & Yang, told the Asia Law Business Journal that the country’s insufficient regulations to safeguard virtual asset users did not align with South Korea’s substantial scale of crypto transactions in 2021.

A STEP IN THE RIGHT DIRECTION?

Amid fears of a collapse similar to the one seen with Terra and to ensure user protection, the new law targets cryptocurrency exchanges based in South Korea, mandating they store user assets through banks in bond and offline to enhance user security.

Third-party management operations are also barred, and service providers must hold assets identical in amount and type to those entrusted by users.

The new act is the latest in the National Assembly’s continued efforts to streamline legislation in line with unconventional currencies, such as tabling a bill to oversee digital assets independently in Nov. 2022.

In the past, the legal system was subject to more regulatory gaps, as cryptocurrencies were under the jurisdiction of the Capital Markets Act, which is designed for a broader financial market.

Experts told Korea Pro that Seoul’s effort to protect virtual investor assets has been a necessary step forward, considering user concerns about the emerging crypto market.

Anndy Lian, an inter-governmental blockchain advisor based in Singapore, lauded the new law as a catalyst for nurturing a transparent legal environment conducive to the growth and innovation of virtual assets.

He told Korea Pro that it could potentially “attract more investment and participation from domestic and foreign entities.”

Lian also anticipated a “smoother integration of virtual assets into the existing financial system,” allowing for more efficient transactions and services and an improvement in the standards of market practice in South Korea.

While attorney Kwon echoed Lian’s views, outlining that the law provides the groundwork for restraining fraudulent virtual asset trading activities within the market, he also highlighted the need for the law to incorporate additional guidelines offering clarity on its clauses.

“While this legislation targets fraudulent virtual asset trading activities, such as unfair trading, it lacks specific details regarding the various forms of fraudulent behavior,” Kwon explained.

Lian also acknowledged this, noting several significant hurdles the legislation must overcome to successfully exercise its projected role in the South Korean virtual asset market.

He noted that the stringent regulations could potentially cause VASPs to exit the South Korean market and restrict crypto services for South Korean users, as the costs and guidelines required by South Korean jurisdiction may prove too challenging.

“We need to understand that we are dealing with innovation and it changes very fast. Creating a baseline and having backup correction plans along the journey would be a more protective method for the South Korean market,” according to Lian.

 

Source: https://koreapro.org/2024/02/new-legislation-to-protect-cryptocurrency-exchange-users-faces-mixed-reactions/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

Crypto Faces Critical Moment as Regulatory Walls Rise

Crypto Faces Critical Moment as Regulatory Walls Rise

I have warned investors that a significant decline in the crypto market could occur if Bitcoin’s value falls below $24,000, amidst a bullish trend since mid-December. This prediction has come true as Bitcoin’s price has dropped by 10% from its February peak, with the possibility of further drops to $20,000. Crypto’s growth in 2022 was driven primarily by monetary policy, but regulations may become a decisive factor this year in determining which companies will succeed and which will fail.

This situation is due to several factors, including the sustained tightening of liquidity and the suspension of bank transfers, notably by Binance in early February. The closure of Silvergate’s exchange network in early March has exacerbated the existing predicament. Furthermore, Signature Bank has recently informed its crypto exchange clients that SWIFT payment transfers of less than $100,000 will no longer be supported, which is related to Coinbase suspending trading of Binance USD. This is a pressing concern that must be considered.

A growing effort is underway to reconsider the relationship between traditional banking systems and the rapidly evolving crypto economy. The fundamental principle of Bitcoin was to create a financial system that operates independently of banks, and some experts are advocating for a completely “bankless” crypto ecosystem. However, the regulatory crackdown this year has given rise to offshore stablecoins such as Tether’s, which continue to gain traction despite a decline in trading volumes.

The lack of a mechanism for transferring traditional currency into the crypto space appears to be causing stagnation, depriving it of the innovation typically associated with a burgeoning industry. This is where Silvergate has emerged as a critical link between investors, hedge funders, and venture capitalists. In addition to facilitating these essential connections, Silvergate allows its clients to settle their balances at any time of day, including weekends and holidays. This 24-hour settlement feature is paramount in the crypto market, allowing investors to capitalize on arbitrage opportunities and ensuring the seamless exchange of collateral, which is managed through smart contracts.

As regulatory hurdles continue to crop up around crypto, the potential consequences of these barriers cannot be ignored. A recent report from Coindesk reveals that close to 200 members of Congress accepted campaign donations from FTX executives. This raises concerns that those who have received these donations may be less inclined to support further regulations, fearing a negative association with an exchange that has previously misused user funds.

Adding to mounting concerns, on January 3, the U.S. Federal Reserve, the FDIC, and the Treasury Department’s Office of the Comptroller of the Currency issued a joint statement warning about the risks that crypto-assets pose to the banking sector. While regulators have previously cautioned against the instability of cryptocurrencies, this latest alert highlights the impact that the crypto ecosystem could have on the financial resilience of traditional banks. This shift in warning, reportedly initiated by the Biden administration, has had a significant impact, causing a chain reaction.

On January 13, the Securities and Exchange Commission (SEC) leveled accusations against the Gemini crypto exchange and Genesis Trading, asserting that the two firms failed to register a crypto lending scheme as a securities offering. The SEC’s stance is that the lending scheme offered by the two firms necessitated registration with the SEC and compliance with relevant securities laws and regulations. The failure to meet these requirements, according to the SEC, put investors at risk and could have violated securities laws.

Custodia Bank, which was founded three years ago to serve as an intermediary between digital assets and the U.S. dollar payment system, suffered a significant setback in late January. The bank was denied membership to the Federal Reserve System and was also refused a master account. One of the primary advantages of being part of the Federal Reserve System is access to a master account, which allows banks to settle transactions with other banks and financial institutions. Custodia Bank’s lack of a master account means that it will have to rely on other banks to handle its transactions, resulting in higher fees and slower processing times. This puts the bank at a significant disadvantage compared to other banks in the digital asset space that have successfully obtained membership in the Federal Reserve System.

Signature Bank has taken a bold move in the face of the crypto industry’s growing regulatory challenges. In early February, the bank announced its decision to suspend SWIFT transfers of crypto-related firms of less than $100,000. The move is a clear indication of the financial institution’s cautious approach to cryptocurrencies, which have been plagued by regulatory ambiguity and concerns over financial crimes. The decision is expected to impact many smaller crypto firms that rely on such transfers, as they may now have to seek alternative methods to move funds. However, some experts argue that the bank’s move is a necessary step to mitigate risks and safeguard the banking sector from potential threats posed by the crypto industry.

In early February, Kraken, a popular crypto exchange, agreed to pay $30 million to settle charges filed by the SEC that it provided unregistered securities through its staking program. The program offered a fixed rate of return to users, regardless of the actual performance of the staked assets, which the SEC determined to be a violation of securities laws. Kraken’s failure to properly register with the SEC put investors at risk and created an unfair advantage for the platform. The settlement serves as a reminder that the cryptocurrency industry is subject to the same rules and regulations as traditional financial markets.

On February 13, Paxos was ordered to halt production of the Binance-branded BUSD stablecoin over concerns that Paxos may have been negligent in monitoring the application of the stablecoin. As a result, the market capitalization of BUSD plunged from $16 billion to its current value of $8 billion. The decision by the New York Department of Financial Services (NYDFS) to halt the production of BUSD caught many in the industry off guard. Paxos had been considered one of the most reliable stablecoin issuers in the market, having received regulatory approval from the NYDFS to operate as a trust company. However, the NYDFS’s move underscores that even well-established firms are subject to regulatory scrutiny.

On March 4, Silvergate Bank made the unexpected move of suspending its exchange network which resulted in the termination of the bank’s relationships with Circle, Crypto.com, and Coinbase. The closure of the exchange network also had potential implications for Bybit, as the exchange had to stop dollar transfers. Silvergate Bank’s decision comes amid mounting scrutiny due to its links with FTX.

On March 8, four days later, Silvergate Bank announced that it was shutting down and liquidating its operations, citing the majority of its deposits leaving its balance sheet, which has impaired its financial stability ratios. The closure of Silvergate Bank highlights the potential fragility of financial institutions in the crypto space and the impact of regulatory changes on their operations.

In a major development for the crypto industry, on March 10, the New York Attorney General’s office filed a lawsuit against KuCoin for alleged violations of securities and commodities laws. The lawsuit accuses KuCoin of misrepresenting itself as an exchange while functioning as a securities and commodities broker-dealer and seeks to block the exchange’s access in New York. However, what is particularly noteworthy about the complaint is the assertion that Ethereum, the second-largest cryptocurrency by market capitalization, is also a security. The lawsuit argues that ETH, along with other cryptocurrencies such as LUNA and UST, is a speculative asset that relies on third-party developers to provide profit to holders of the cryptocurrency. This lawsuit could have significant implications for the entire industry, as it could open the door to increased regulatory scrutiny and potentially even more legal challenges in the future.

I am very sure that crypto investors are not giving up without a fight. Although Kraken faced a staking defeat, Coinbase CEO Brian Armstrong has defended the firm’s staking service and is willing to defend its product in court if necessary. Well-funded firms such as Coinbase and Ripple may have the financial means to take on the SEC. Ripple’s CEO Brad Garlinghouse has warned that SEC regulations could make the U.S. a less attractive location for crypto firms.

Although the SEC had initially opposed Binance’s acquisition of Voyager Digital which filed for bankruptcy after Three Arrows Capital defaulted on a $670 million loan provided by the broker, a bankruptcy judge has approved the deal. While there are still regulatory obstacles to overcome, the judge appears to be leaning toward approval. Following the announcement, the Voyager VGX tokens saw an increase of 16% in 24 hours, potentially resulting in Voyager creditors receiving 73% of their funds back.

In a separate case, judges are questioning why Bitcoin spot markets can be manipulated while Bitcoin futures markets, which are approved for trading on U.S. soil and through ETFs, cannot. The SEC has claimed that a 99% correlation does not equate to causation, citing the fragmentation of Bitcoin spot markets compared to the centralized trading of Bitcoin futures on the CME in Chicago. As a result, the discount on the Grayscale GBTC has decreased from an all-time low of -48% to -36%, as speculation about the possibility of converting the trust into an ETF has increased. The spread has likely reached a floor with a potential downside of -10% and an upside of +33%, which I predicted in our 2023 outlook report published in December 2022. Although a Bitcoin ETF would have been significant two years ago, many interested investors have since set up alternative accounts to buy Bitcoin.

However, all hope is not lost, and these developments indicate potential opportunities in the cryptocurrency market for investors.

Source: https://intpolicydigest.org/crypto-faces-critical-moment-as-regulatory-walls-rise/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j