South Korea Mandates Insurance for Closed Crypto Exchanges

• South Korea mandates insurance for defunct crypto exchanges to protect user assets.  
• Virtual Asset User Protection Act enforces strict measures on crypto exchanges’ operations.  
• Non-compliance with South Korea’s crypto rules can result in fines or service suspension.

South Korea’s Financial Supervisory Service (FSS) now requires defunct cryptocurrency exchanges to obtain insurance to safeguard user assets. This measure comes as part of a wider initiative to bolster investor protections following the recent implementation of the Virtual Asset User Protection Act, South Korea’s first comprehensive regulatory framework for the crypto industry.

The new insurance mandate aims to protect assets held by bankrupt exchanges, mitigating risks associated with potential hacking incidents . Several exchanges that have shut down, including GDAC and Hanbitco, have already secured insurance coverage.

Huobi Korea , another major exchange, is reportedly considering taking similar steps to meet this regulatory demand. This insurance mandate directly enforces the Virtual Asset User Protection Act, ensuring user funds remain protected even after an exchange closes.

The Virtual Asset User Protection Act, passed on July 18, 2024, introduces strict regulations to increase investor security and curb unfair trading practices. Under this legislation, South Korean cryptocurrency trading platforms must isolate at least 80% of customer funds in cold storage solutions, separate from the exchanges’ operational funds.

Additionally, exchanges are required to accept user cash deposits to locally licensed banks and maintain cryptocurrency reserves matching the type and quantity of customer deposits.

The Act also requires crypto services to purchase adequate insurance or establish reserve funds to cover potential losses from hacking or liquidity crises. These measures aim to ensure exchanges have the financial capacity to compensate users in case of unforeseen events.

The Virtual Asset User Protection Act carries severe penalties for non-compliance. Cryptocurrency exchanges that fail to adhere to these new regulations may face substantial fines or service suspension by the Financial Services Commission (FSC).

Moreover, the Act outlines harsh consequences for those involved in market manipulation. Individuals found guilty of distributing false information, engaging in price manipulation, or leveraging insider knowledge for personal gain could face hefty penalties and potential imprisonment.