Full text of South Korea’s first independent “Encryption Act”: Insider trading carries a maximum sentence of life imprisonment.

South Korea's first "Encryption Act": Insider trading punishable by life imprisonment.

H. It stipulates the supervision and inspection matters of financial authorities on virtual asset operators, as well as the power to investigate unfair trade practices (Articles 13 to 15).

I. It allows the central bank to require virtual asset operators to submit documents when implementing monetary and credit policies, maintaining financial stability, and ensuring the smooth operation of payment and settlement systems (Article 16).

J. It stipulates the relevant matters of punishment and increased punishment for those who engage in unfair trade practices, allows the cancellation of qualifications and fines to be combined in the case of imprisonment, and stipulates matters regarding confiscation and providing relief from punishment (Articles 19 to 21).

K. Anyone who violates the obligations defined in this law, except for unfair trade practices, shall be fined no more than 100 million won (Article 22).

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Virtual Asset User Protection Act

Chapter 1 Overview

Article 1 (Purpose) The purpose of this Act is to protect the rights and interests of virtual asset users, establish transparent and sound transaction order in the virtual asset market by establishing measures to protect the assets of virtual asset users and regulate unfair trading activities.

Article 2 (Definitions) The following terms used in this Act shall have the following meanings.

1. “Virtual asset” means an electronically expressed representation (including any rights therein) that has economic value and can be traded or transferred electronically. However, it does not include anything belonging to any of the following titles:

A. Electronic certificates that cannot be exchanged for money, goods, services, etc., or information related to such certificates, the use of which has been restricted by the issuer

B. Tangible and intangible results obtained by using game materials in accordance with Article 32 (1) (7) of the Game Industry Promotion Act

C. Pre-paid electronic payment tools stipulated in Article 2 (14) of the Electronic Financial Transactions Act and electronic currency stipulated in the same paragraph (15)

D. Electronic registered shares under Article 2(4) of the Electronic Registration of Stocks and Bonds Act

E. Electronic bills of exchange under Article 2(2) of the Electronic Bill of Exchange Issuance and Distribution Act

F. Electronic bills of lading under Article 862 of the Commercial Code

G. Electronic currency issued by the Bank of Korea under the Bank of Korea Act and related services

Article H. The form and nature of transactions shall be determined by presidential decree.

2. “Virtual asset business” means any of the following activities related to virtual assets:

A. The act of selling and buying virtual assets (hereinafter referred to as “trading”)

B. The act of exchanging other virtual assets with virtual assets

C. The act of transferring virtual assets in accordance with the presidential decree

D. The act of storing or managing virtual assets

E. The act of intermediating, arranging or representing any of the activities listed in A and B

3. “User” means a person who purchases, sells, exchanges, transfers, stores, and manages virtual assets through virtual asset business.

4. “Virtual asset market” means a market where virtual assets can be bought and sold or exchanged with virtual assets.

Article 3 (Application to Foreign Acts) This Act shall also apply to acts performed abroad that have an impact in Korea.

Article 4 (Relationship with Other Laws) Unless otherwise provided by other laws, virtual assets and virtual asset operators shall be subject to the jurisdiction of this Act.

Article 5 (Establishment of Virtual Asset Committee) (1) The Financial Services Commission may establish and operate a virtual asset committee to provide recommendations on policies and systems related to virtual asset markets and virtual asset businesses under this Act or other laws and regulations.

(2) Necessary matters concerning the composition and operation of the committee referred to in paragraph (1) shall be prescribed by presidential decree.

Chapter 2 Protection of User Assets

Article 6 (Protection of Deposits) (1) A virtual asset business operator shall separate user deposits (meaning funds deposited by users for trading virtual assets, intermediary trading, and other business activities) from its own property and deposit or entrust them to an authoritative agency (hereinafter referred to as the “management agency”) in the manner prescribed by presidential decree, such as a bank specified in the Bank Act.

WEEX Note: This article emphasizes that virtual asset operators should separate their assets from customer deposits, which is the world-recognized and most basic “asset segregation principle.”

Legal case: In June 2023, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance, which included 13 charges, alleging that Binance and its U.S. branches transferred more than $12 billion in customer assets to entities controlled by Binance founder Zhao Changpeng (CZ), including mixing customer and company funds in Merit Peak, a trading company owned by Zhao Changpeng; According to audit firm Armanino’s findings, Binance had “significant deficiencies” in operating the BINANCE.US platform and controlling customer assets, including mixing customer and company funds, relying on the parent company for financial data, and lacking disaster response plans.

Article 6 (Deposit and Custody of Virtual Assets)

① When a virtual asset business operator receives a deposit of virtual assets or undertakes custody of virtual assets in accordance with the user’s request, the virtual asset business operator shall disclose that the deposit or custody is the property of the user.

② No one shall offset or seize a deposit stored or entrusted to a management agency pursuant to paragraph 1, and a virtual asset business operator that stores or entrusts the deposit stored or entrusted to a management agency shall not transfer or provide security for the deposit stored or entrusted to a management agency, unless otherwise provided by Presidential Decree.

③ If a virtual asset business operator falls under any of the following subparagraphs, the management agency shall pay the deposited or entrusted deposit to the user at the user’s request in accordance with the method and procedure prescribed by Presidential Decree:

1. Commercial registration is cancelled

2. In the case of a resolution to dissolve or merge

3. In the case of bankruptcy declaration

Article 7 (Storage of Virtual Assets)

① If a virtual asset enterprise is entrusted by a user to store virtual assets, it shall establish and keep a user registration book containing the following items:

1. User’s address and name

2. Type and quantity of virtual assets entrusted by the user

3. User’s virtual asset address (a unique identification number generated electronically for the purpose of managing the transmission and storage history of virtual assets)

② A virtual asset business operator shall keep its own virtual assets separate from the user’s virtual assets, and shall actually hold virtual assets of the same type and quantity as those entrusted by the user.

③ The virtual asset business operator shall store the virtual assets entrusted by the user in accordance with the proportion prescribed by Presidential Decree, separately from the Internet in a secure manner.

④ A virtual asset business operator may entrust the virtual assets of a user to an institution that meets the safety standards prescribed by Presidential Decree for storage.

Article 8 (Obtaining Insurance, etc.)

In order to fulfill its responsibilities in the event of an accident prescribed by Presidential Decree, such as a hacker attack or computer failure, a virtual asset business operator shall take necessary measures, such as obtaining insurance or deductible or accumulating reserve funds in accordance with the standards prescribed by the Financial Services Commission (e.g., WEEX Exchange established a 1,000 BTC investor protection fund).

Article 9 (Establishment, retention and destruction of transaction records)① Virtual asset trading institutions shall keep virtual asset transaction records that can track and query buying and selling transactions or records of confirming and correcting transaction content errors (hereinafter referred to as “virtual asset transaction records”) for 15 years from the date of the end of the transaction relationship.② Presidential decree shall stipulate the types, storage methods, destruction procedures and methods of virtual asset transaction records that virtual asset enterprises should keep.Chapter III Regulation of Unfair TradeArticle 10 (Prohibition of unfair trading behavior, etc.)① Those who fall under any of the following items shall not use undisclosed significant information on virtual assets (meaning information that may have a significant impact on the investment judgment of users before being disclosed in accordance with the methods prescribed by presidential decree) for the purchase, sale or other transaction of such virtual assets, nor shall they be used by others.1. Virtual asset companies, virtual asset issuers (including legal entities, hereinafter the same) and their employees and agents who know undisclosed significant information in the course of performing their duties2. Legal entities who know undisclosed significant information in the process of exercising their rights as major shareholders (in this case, “financial companies” should be considered as “legal entities” in accordance with Article 2, Paragraph 6 of the Financial Company Governance Act)3. Those who know undisclosed significant information in the process of exercising their rights4. Those who have a license, authorization, guidance, supervision or other authority over virtual asset companies or virtual asset issuers according to laws and regulations, and who know undisclosed significant information in the process of exercising such authority; and those who have signed a contract with virtual asset companies or virtual asset issuers and who know undisclosed significant information in the process of signing, negotiating or performing the contract5. Agents (including their employees and agents, if such person is a company), users or any other employees (including their employees and agents, if such person is a company) who become aware of undisclosed significant information in the course of performing their duties under items 2 to 46. Those who received undisclosed significant information from any of the persons under items 1 to 5 (including those who have not been more than one year since they no longer fall under any of the items 1 to 5)

7. Any other persons designated by presidential order.

WEEX Note: The first six items define “insiders,” which can refer to individuals or entities who possess undisclosed information and trade upon it within a company or organization. This insider information may include significant financial data, undisclosed business decisions, merger and acquisition plans, major contracts, product innovations, and other important information related to the company. Insiders may include senior management, directors, employees, partners, or other individuals who are closely associated with the company.

② No one shall engage in any of the following activities to mislead others into buying and selling virtual assets, or to otherwise cause others to make incorrect judgments:

1. Arranging for others to buy and sell virtual assets at the same price while selling their own assets in advance

2. Arranging for others to sell virtual assets at the same price while purchasing their own assets in advance

3. Engaging in false trading that does not involve the transfer of trading rights for virtual assets

WEEX Note: The first two items prohibit insiders from using insider information to profit from trading, also known as “rat trading.” The third item prohibits “wash trading.”

Judicial case: The above-mentioned SEC’s charges against Binance include: accusing Binance of conducting wash trading on its U.S. platform, which usually leads to artificially inflated trading volume and creates a false impression of market interest. It is reported that most of these trades were conducted through Sigma Chain, which is owned and controlled by Zhao Changpeng, thus constituting the “wash trading” behavior prohibited by the above-mentioned third item.

4. Commissioning or acting on behalf of the conduct stipulated in items 1 to 3.

③ No one shall falsely make virtual asset transactions look active or engage in buying and selling of virtual assets that fluctuate or fix the market price of virtual assets, or commission or entrust such activities.

④ No one shall engage in the following activities related to purchasing, selling, or other transactions of virtual assets:

1. Using fraudulent means, schemes, or technologies

2. Making false statements or representations regarding significant matters, or using documents or other statements or representations that omit necessary significant facts so as not to mislead others, in order to obtain economic or other property benefits

3. Use false market prices to induce the purchase or sale of virtual assets or other transactions

4. Commission or entrust the above-mentioned behaviors

⑤ A virtual asset enterprise may not engage in the sale, purchase, or other transactions of virtual assets issued by itself or persons with special relationships as specified in presidential decrees (hereinafter referred to as “related parties”), unless it belongs to any of the following:

1. It is a virtual asset issued as a payment method for specific goods or services. The virtual asset operator provides specific goods and services promised to users and obtains virtual assets as a return

2. When the virtual asset provider unavoidably obtains virtual assets due to the characteristics of virtual assets and follows the procedures and methods stipulated by presidential decrees to prevent unfair trade practices or conflicts of interest with users

⑥ Those who violate the provisions of paragraphs 1 to 5 shall be responsible for compensating users for losses suffered due to violations when purchasing, selling or other transactions of virtual assets.

Article 11 (Prohibition of arbitrarily blocking deposits and withdrawals of virtual assets)

① Without justifiable reasons stipulated by presidential decrees, virtual asset business may not block users from depositing or withdrawing virtual assets (WEEX Note: Users shall not be arbitrarily restricted from depositing, withdrawing and trading).

② If the virtual asset business operator blocks users from depositing or withdrawing virtual assets, it shall notify the user of the reason in advance and immediately report this fact to the Financial Services Commission.

③ Those who violate the provisions of paragraph ① shall compensate the person who conducts virtual asset transactions or entrusts transactions for the losses suffered by the violation according to the transaction or entrustment price formed due to the violation.

④ The right to claim compensation according to the provisions of paragraph ③ shall be invalidated due to the statute of limitations for litigation if the claimant does not exercise the right within two years after knowing the behavior of violating paragraph ① or within five years after the occurrence of such behavior. (WEEX Note: The statute of limitations for litigation is up to 5 years.)

Article 12 (Monitoring abnormal transactions)

① The virtual asset market operator who opens and operates a virtual asset market shall monitor abnormal transactions specified in presidential decrees (hereinafter referred to as “abnormal transactions”), such as transactions with abnormal fluctuations in virtual asset prices or transaction volumes, and take appropriate measures as stipulated by the Financial Services Commission to protect users and maintain good trading order.

Article 2: If a virtual asset operator under Article 1 suspects a violation of Article 10, it shall promptly notify the Financial Services Commission and the head of the Financial Supervisory Authority (hereinafter referred to as the “Financial Services Commission”) of the violation. However, in the case of rules and notices issued by the Financial Services Commission, for example, when suspicions of a violation of Article 10 are fully confirmed, the parties concerned shall promptly report to the investigating agency and report the facts to the head of the Financial Services Commission and the Financial Supervisory Authority.

Chapter 4: Supervision and Disposition, etc.

Article 13 (Supervision and Inspection of Virtual Asset Business) Paragraph 1: The Financial Services Commission may supervise whether virtual asset business correctly complies with this Act or any orders or dispositions under this Act and may inspect the business and property status of virtual asset business.

Paragraph 2: In order to protect users and maintain a sound trading order, the Financial Services Commission may, if necessary, order virtual asset business operators or interested parties designated by the President to take necessary measures for any of the following:

1. Matters related to submission of documents to verify compliance with this Act or any orders or dispositions under this Act

2. Matters related to the operation of unique property

3. Matters related to the storage and management of user property

4. Matters related to maintaining trade order

5. Matters related to business methods

6. Matters related to protecting users in the event of business interruption, such as dissolution resolutions or bankruptcy declarations

7. Other necessary matters designated by Presidential Decree for the protection of users and the maintenance of a sound trading order

Paragraph 3: When conducting an inspection under Paragraph 1, the Financial Services Commission may, if it deems it necessary, require virtual asset business operators to report on their business or property, submit data, attend as witnesses, provide testimony, and express opinions.

Paragraph 4: Persons conducting inspections under Paragraph 1 shall wear certificates indicating their authority and present them to relevant personnel. The Financial Services Commission may specify and notify the methods and procedures of inspections, standards for taking action based on inspection results, and other necessary matters related to inspection business.

Article 14 (Investigation and Measures against Unfair Trading Acts)

① The Financial Services Commission may order a person who is suspected of violating an order or disposition under this Act or this Act to submit a report or data for reference, or may urge the head of a financial supervisory agency to inspect account books, documents or other items when it deems it necessary to protect users or maintain the soundness of transactions.

② In order to investigate under paragraph ①, the Financial Services Commission may require any person suspected of a crime or other relevant person to provide any of the following:

1. A statement of facts and circumstances regarding the investigation

2. A statement regarding the investigation

3. Present books, documents and other items necessary for the investigation

③ When conducting an investigation pursuant to paragraph ①, if it deems it necessary to investigate a violation of Article 10, the Financial Services Commission may take any of the following measures:

1. Detain account books, documents and other items submitted under paragraph ②

2. Enter the offices or business premises of relevant personnel to inspect business, account books, documents, and other items.

④ If the Financial Services Commission deems it necessary to investigate under paragraph ①, it may require virtual asset operators to submit data necessary for the investigation in accordance with the method prescribed by the Presidential Decree.

⑤ Persons conducting investigations under paragraphs ③ and ② shall carry certificates indicating their authority and present them to relevant personnel.

⑥ The Financial Supervisory Commission may disclose the results of investigations and measures against relevant personnel and other information and data necessary to prevent improper behavior of relevant personnel in accordance with the method prescribed by the Presidential Decree.

⑦ The head of the financial supervisory agency shall report the results of the investigation conducted under paragraph ① to the Financial Services Commission.

Article 15 (Measures against Virtual Asset Businesses)

① If the Financial Services Commission finds that a virtual asset business or a stakeholder designated by the Presidential Decree has violated an order or disposition under this Act or this Act, it may take any of the following measures:

1. Order to correct illegal acts

2. Warning

3. Admonition

4. Suspend all or part of the business

5. Notify or transfer to law enforcement agencies

2. If the Financial Services Commission finds that an employee of a virtual asset company has violated an order or disposition under this Act or regulations under this Act, it may take any of the following measures against the employee who engaged in the violation:

1. Recommend that an official be dismissed or suspended within six months

2. Request that an employee be dismissed or suspended

3. Request that an employee be admonished, warned, or reprimanded

3. If the Financial Services Commission intends to take a disposition corresponding to a recommendation for dismissal or a request for dismissal under paragraph 2 of this Article, it shall hold a hearing.

Article 16 (Request for Submission of Documents from Bank of Korea) If the Financial Services Commission deems it necessary for the smooth operation of the payment and settlement system related to virtual asset transactions in order to carry out monetary and credit policies and financial stability, it may request that the Bank of Korea provide documents from virtual asset operators. In this case, the requested data shall be limited to the minimum necessary range, taking full account of the business burden of virtual asset operators.

Article 17 (Penalties for Unfair Trading Practices) (1) The Financial Services Commission may impose a penalty on a person who violates the provisions of paragraphs (1) through (4) of Article 10 in an amount not exceeding twice the profit (including unrealized profit, hereinafter the same applies in this Article) obtained from the illegal act or the amount of loss avoided as a result of the illegal act. If there is no profit obtained from the transaction related to the illegal act or the amount of loss avoided as a result of the illegal act, or if it is difficult to calculate, a fine of not more than KRW 4 billion (WEEX Note: approximately USD 3.073 million) may be imposed.

(2) When imposing a fine pursuant to paragraph (1), if the same offense is committed under Article 19, the Financial Services Commission may cancel the penalty imposed pursuant to paragraph (1) or exclude the entire or part of the amount equivalent to the penalty from the penalty (including any confiscated or recovered amount).

(3) If the Financial Services Commission requests the submission of materials related to an investigation in order to impose a penalty pursuant to paragraph (1), the Prosecutor General may provide such materials to the extent deemed necessary.

(4) Articles 431 to 434 and Articles 434-2 to 434-4 of the Capital Market and Financial Investment Business Act shall apply to matters concerning the submission of opinions on fines, appeals, extension of the deadline for payment of fines and payment by installments, collection of fines and handling of debts, refund of excess payments, calculation of refund value, and handling of defects.

Article 5. (Penalties)

① Any person who violates any of the following subparagraphs shall be punished by imprisonment with labor for more than one year or by a fine of three times or more the profits gained or losses avoided by the crime: Provided, That if the amount of profits gained or losses avoided by the crime cannot be calculated or is difficult to calculate, or if the amount of the fine corresponding to five times the amount of profits gained or losses avoided by the crime is within KRW 500 million, the upper limit of the fine shall be KRW 500 million (WEEX Note: approximately USD 384,000).

1. A person who, in violation of the provisions of subparagraph 1 of Article 10, purchases, sells, or engages in other transactions with newly added assets that are related to virtual assets and that involve undisclosed important information related to virtual assets that could cause others to use them or cause others to use them.

2. A person who violates the provisions of subparagraph 2 of Article 10 and engages in any of the acts listed in the same subparagraph that misleads others about the nature of virtual assets for the purpose of misleading others into buying or selling them or causes others to make erroneous judgments in other ways.

3. A person who violates the provisions of subparagraph 3 of Article 10 and engages in the sale or consignment of virtual assets, or the behavior of floating or fixing the market price of virtual assets, for the purpose of attracting the sale or purchase of virtual assets, misleadingly making people think that the sale or purchase is prosperous.

4. A person who engages in any of the acts related to buying and selling virtual assets or other transactions listed in subparagraph 4 of Article 10.

② Any person who violates the provisions of subparagraph 5 of Article 10 and engages in the purchase and sale of virtual assets issued by himself or a related party shall be punished by imprisonment for not more than 10 years or by a fine of three times or more the profits gained or losses avoided by the crime. Provided, That if the amount of profits gained or losses avoided by the crime cannot be obtained or is difficult to calculate, or if the amount of the fine corresponding to five times the amount of profits gained or losses avoided by the crime is within KRW 500 million, the upper limit of the fine shall be KRW 500 million.

WEEX Summary: Those engaged in related party transactions shall be sentenced to imprisonment for up to ten years or a fine of 3-5 times the profit amount, or a maximum fine of KRW 500 million.

③ If the profit or loss amount obtained or avoided by violating the provisions of paragraph ① exceeds KRW 5 billion, the imprisonment stipulated in paragraph ① shall be increased according to the following subparagraphs:

1. If the profit or loss amount exceeds KRW 50 billion: life imprisonment or imprisonment for more than 5 years (WEEX note: Those who profit from insider trading more than KRW 50 billion may be sentenced to life imprisonment.)

2. If the profit or loss amount exceeds KRW 500 million but is less than KRW 50 billion: imprisonment for more than 3 years

④ If the profit or loss amount obtained or avoided by violating the provisions of paragraph ② is KRW 500 million or more, the imprisonment stipulated in paragraph ② shall be increased according to the following subparagraphs:

1. If the profit or loss amount is KRW 50 billion or more: imprisonment for 3 years or more (WEEX note: Those who profit from falsely trading more than KRW 50 billion may be sentenced to imprisonment for 3 years or more.)

2. If the profit or loss amount exceeds KRW 500 million but is less than KRW 50 billion: imprisonment for not less than 2 years

⑤ In the case of imprisonment under the provisions of paragraphs ① to ④, disqualification for up to 10 years and fines may be combined.

⑥ The profits (including unrealized profits) or loss amounts obtained or avoided by violating paragraphs ① and ② shall be the difference between the total income generated by the transaction through the violation and the total cost of the transaction (WEEX note: calculated based on illegal profit/loss amount, not the amount involved. Therefore, if insider trading results in a loss, the severity of the offense is reduced). In this case, the specific calculation method for each crime shall be determined by presidential decree.

Article 20 (Confiscation and Seizure) ① The property obtained by those falling under subparagraphs ① and ② of Article 19 shall be confiscated, and if it cannot be confiscated, its value shall be seized. The property provided or attempted to be provided by those falling under subparagraphs ② to ④ of Article 19 and paragraph ② shall be confiscated, and if it cannot be confiscated, its value shall be seized.

Article 21 (Penalty) If the representative of a legal entity (including an organization, the same applies hereinafter in this Article) or an agent, user, or other employee of a legal entity or individual violates the provisions of Article 19 in the affairs of the legal entity or individual, in addition to punishing the perpetrator, a fine shall be imposed on the legal entity or individual in accordance with this Article. However, if the legal entity or individual did not exercise appropriate care and supervision over the affairs of the legal entity or individual to prevent the occurrence of a crime, it shall not be subject to this provision.

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