South Korea Tightens Crypto Rules to Attract Institutional Investors

South Korea is implementing stricter regulations for digital asset transactions as it prepares to welcome institutional investors into its crypto market. The Financial Services Commission (FSC) of South Korea announced new guidelines during its fourth Virtual Asset Committee meeting on May 20, which are set to take effect in June. These measures aim to enhance compliance and security, creating a more robust and transparent environment for digital asset trading.

The updated rules allow both nonprofit organizations and virtual asset exchanges to sell cryptocurrencies, but under new compliance standards. Nonprofit entities must have at least five years of audited financial history to be permitted to receive and sell virtual asset donations. They will also need to establish internal Donation Review Committees to assess the appropriateness of each donation and the liquidation strategy. All donations must be routed through verified Korean won exchange accounts, with verification responsibilities placed on banks, exchanges, and the nonprofits themselves. Only cryptocurrencies listed on at least three major domestic exchanges will be eligible, and liquidation is expected to occur immediately upon receipt.

Crypto exchanges will be allowed to liquidate user fees paid in crypto, but only to cover operational costs. Sales will be capped at daily limits, typically no more than 10% of the total planned amount. Sales will only be permitted for the top 20 tokens by market cap across five won-based exchanges. Exchanges are barred from selling tokens on their own platforms to prevent conflicts of interest. The revised rules also aim to curb instability from sudden price spikes by requiring a minimum circulating supply before a token is allowed to trade and temporarily restricting market orders post-listing. So-called zombie tokens and memecoins without clear utility will face more scrutiny, with exchanges required to delist tokens if they fail to meet liquidity benchmarks or community engagement thresholds.

Starting in June, exchanges and nonprofits can apply for real-name accounts to facilitate these sales. Later this year, the FSC plans to extend real-name accounts to listed firms and professional investors. These measures are part of a broader effort to enhance the regulatory framework governing digital assets, ensuring that exchanges and banks improve their identity checks and anti-money laundering controls.

The tightening of crypto rules comes as South Korea aims to attract institutional investors to its market. The financial regulator has finalized new guidelines that will govern the operations of exchanges and banks, focusing on compliance and security. These measures are designed to create a more robust and transparent environment for digital asset trading, which is expected to boost investor confidence and encourage institutional participation.

The new regulations also address the concentration of market power among a few major players. South Korea's strict compliance rules have led to the exit of many smaller exchanges, leaving a few dominant forces in the market. This consolidation is seen as a positive development by some analysts, as it reduces the risk of fraud and enhances the overall stability of the market.

In addition to the crypto-specific regulations, South Korea has also revised its audit laws to reward companies with strong governance practices. Firms recognized for their excellent accounting and auditing governance will be exempt from having to rotate auditors for three years. This move is part of a broader effort to promote good corporate governance and transparency, which are essential for attracting institutional investors.

The implementation of these new regulations is expected to have a significant impact on the South Korean crypto market. By enhancing compliance and security, the country aims to create a more attractive environment for institutional investors, who have been cautious about entering the market due to regulatory uncertainties. The new guidelines are also expected to reduce the risk of fraud and enhance the overall stability of the market, making it more appealing to both domestic and international investors.

Overall, South Korea's decision to tighten crypto rules ahead of institutional market entry is a strategic move aimed at creating a more robust and transparent digital asset market. By enhancing compliance and security, the country aims to attract institutional investors and promote the growth of the crypto industry. The new regulations are expected to have a positive impact on the market, creating a more stable and attractive environment for all participants.