Strict Liability for Damages Discussed in Second Phase of Virtual Asset Legislation... Exchange Governance Reform Also Considered

Reviewing Limits on Major Shareholder Stakes in Domestic Virtual Asset Exchanges
Government Bill Submission Likely Delayed Until Next Year Due to Stablecoin Disputes

The Digital Asset Basic Act (the so-called “second phase” of virtual asset legislation) currently being prepared by the government is expected to include investor protection measures such as strict liability for damages without fault by digital asset service providers, and the isolation of bankruptcy risk for stablecoin issuers. The government is also reportedly considering governance reforms, including limiting the shareholding ratio of major shareholders in domestic virtual asset exchanges.

According to financial industry sources and the National Assembly on December 30, the government bill for the Digital Asset Basic Act being reviewed by the Financial Services Commission is said to contain these provisions.

First, as part of investor protection measures, stablecoin issuers will be required to manage their reserve assets in deposits or government bonds, and to deposit or entrust at least 100% of the outstanding issuance amount with banks or other custodians. This is intended to prevent the bankruptcy risk of the issuer from being transferred to investors in the event of a crisis.

The bill may also require digital asset service providers to meet obligations for explanations, terms and conditions, and advertising regulations at a level comparable to those in the financial industry. In addition, if hacking or system failures occur, digital asset service providers could be held strictly liable for damages without fault, similar to the standards in the Electronic Financial Transactions Act.

The bill is also expected to address the issue of permitting domestic sales of digital assets on the condition of sufficient information disclosure. This is interpreted as an effort to improve the practice of circumventing the 2017 administrative ban on domestic initial coin offerings (ICOs) by issuing assets overseas and then listing them domestically.

There is also a possibility that the government bill will include governance reform measures for major domestic virtual asset exchanges such as Upbit, Bithumb, Coinone, and Korbit. The Financial Services Commission is reportedly reviewing the introduction of a major shareholder eligibility screening system for exchanges, at a level similar to that for Alternative Trading Systems (ATS) under the Capital Markets Act, in order to address excessive profit concentration and control by a small number of founders and shareholders.

Accordingly, there is a possibility that the government bill will include a plan to limit the shareholding ratio of major shareholders to around 15%. Under the current Capital Markets Act, ATS operators are not allowed to own more than 15% of voting shares, including those held by related parties. However, public funds or those with separate approval from the Financial Services Commission may exceptionally hold up to 30%. If this plan is implemented, operators such as Dunamu (which runs Upbit), Bithumb, and Coinone are expected to be affected. However, the Financial Services Commission stated, "No key details of the second phase law, including governance reforms for virtual asset exchanges, have been finalized."

The submission of the government bill is expected to be possible only early next year, as major issues, such as the identity of stablecoin issuers and other related institutions, remain unresolved. The Bank of Korea maintains that only consortia in which banks hold a majority (51%) stake should be allowed to issue stablecoins, considering operational stability and regulatory compliance capacity. In contrast, the Financial Services Commission is reportedly of the view that legally mandating the bank consortium shareholding ratio is inappropriate if the goal is to expand innovation by increasing the participation of technology companies.

As the submission of the government bill by the Financial Services Commission is delayed, the ruling party’s Digital Asset Task Force (TF) is reportedly preparing its own TF proposal based on the draft bills submitted by lawmakers so far.