South Korea Plans to Restrict Crypto Purchases with Credit Cards

South Korea, one of the world’s largest crypto markets, is preparing to tighten its regulations on the use of credit cards for buying virtual assets. The move is aimed at preventing money laundering, fraud, and excessive speculation in the volatile crypto space.

New Act to Prohibit Credit Card Crypto Purchases

According to a news report by Cryptonews, the South Korean Financial Services Commission (FSC) has proposed a new act that would prohibit citizens from buying crypto using credit cards on foreign exchanges. The act, which is called the Virtual Asset User Protection Act, is expected to take effect on July 19, 2024.

The act defines virtual assets as “digital tokens that can be exchanged for goods, services, or other virtual assets, or that can be used as a means of payment or investment.” The act excludes non-fungible tokens (NFTs), central bank digital currencies (CBDCs), electronic bonds, and mobile gift certificates from the definition of virtual assets.

The act also provides legal grounds for imposing sanctions, including criminal penalties and fines, on unfair trading activities using virtual assets, such as market manipulation, insider trading, and fraud. The act also requires virtual asset service providers (VASPs), such as exchanges, to monitor abnormal transactions and report suspicious activities to the FSC and other authorities.

Enhanced Customer Protection Measures for VASPs

The FSC has also proposed detailed rules to protect the customers of VASPs under the act. The rules are open for public comment until January 22, 2024. The rules cover various aspects, such as:

• Safekeeping of funds and assets: VASPs must keep customers’ funds separate from their own funds and store them in designated custodian banks. The banks can only invest the funds in safe assets, such as government bonds. VASPs must also store 80% or more of customers’ virtual assets in cold wallets, which are offline and less vulnerable to hacking. VASPs must also calculate the economic value of customers’ virtual assets monthly and ensure sufficient holdings. VASPs must also purchase liability insurance or set aside reserves equivalent to 5% of customers’ virtual assets stored in hot wallets, which are online and more exposed to cyberattacks.
• Transaction transparency and fairness: VASPs must disclose the fees, risks, and terms and conditions of using their services to customers. VASPs must also provide customers with transaction records and receipts. VASPs must not arbitrarily block or delay customers’ deposits or withdrawals without justifiable grounds, such as computer failures, legal requests, or hacking incidents.
• Anti-money laundering and compliance: VASPs must verify the identity of customers and prevent the use of credit cards for buying virtual assets on foreign exchanges. VASPs must also implement internal control systems and comply with the relevant laws and regulations, such as the Act on Reporting and Using Specified Financial Transaction Information and the Foreign Exchange Transactions Act.

South Korea’s Crypto Regulatory Landscape

South Korea has been one of the most active and influential countries in the crypto sector, with a large and enthusiastic user base and a vibrant ecosystem of startups and innovators. However, the country has also faced various challenges and controversies, such as hacking incidents, tax disputes, and regulatory uncertainty.

The FSC has been leading the efforts to establish a clear and comprehensive legal framework for the crypto industry, in collaboration with other agencies and stakeholders. The FSC has introduced several measures, such as:

• Registration and licensing of VASPs: The FSC has required all VASPs to register with the Korea Financial Intelligence Unit (KoFIU) and obtain an information security management system (ISMS) certification by September 24, 2023. The FSC has also required VASPs to partner with banks to provide real-name accounts for customers by the same deadline. The FSC has warned that VASPs that fail to comply with the requirements will face closure and penalties.
• Taxation of crypto income: The FSC has announced that it will impose a 20% tax on income from crypto transactions exceeding KRW 2.5 million (USD 2,100) per year, starting from January 1, 2024. The FSC has also clarified that crypto gifts and inheritances will be subject to the same tax rate as other assets.
• Disclosure of crypto holdings: The FSC has announced that it will require companies and public officials to disclose their crypto holdings and transactions, starting from March 1, 2024. The FSC has said that the measure is intended to prevent conflicts of interest and corruption involving crypto assets.

The FSC has stated that its goal is to promote the healthy and orderly development of the crypto industry, while protecting the interests and rights of users and investors. The FSC has also expressed its willingness to cooperate with the global community and adopt international standards and best practices for crypto regulation.