Blockchain startup should pay attention to the key points of the 'Virtual Asset User Protection Act'.

Recently, startups based on blockchain technology are experiencing remarkable growth. Along with this technological innovation, virtual assets are increasingly integrated into everyday life, highlighting the need for protection of virtual asset users. Last June, South Korea passed the “Act on the Protection of Virtual Asset Users,” (hereinafter referred to as the “Virtual Asset User Protection Act”) through the National Assembly, setting a new milestone for the virtual asset market.

This Act serves as the first law to protect general individuals who engage in virtual asset transactions, aiming to increase the transparency of the virtual asset market and strengthen user protection by providing a legal basis. Blockchain-based services and startups utilizing virtual assets can view this Act not just as regulation, but as an opportunity for reviewing their business models and innovating.

Key Contents of the Virtual Asset User Protection Act

1. Scope of Application to NFTs and Virtual Assets
NFTs (Non-Fungible Tokens) are digital assets with uniqueness and scarcity, and are generally excluded from the scope of the Virtual Asset User Protection Act. This is primarily intended to address NFT trading for collection purposes. However, if NFTs are used as a means of payment for goods or services, they may be considered virtual assets, and startups dealing with NFTs in this form may be subject to the Act’s regulations.

Therefore, blockchain startups operating businesses centered around NFTs should carefully review how NFTs are being used and whether those activities fall under the Act’s application. Particular care is needed when designing businesses that connect digital and physical assets.

2. Customer Asset Management
Safe management and protection of customer assets is one of the core elements of the Virtual Asset User Protection Act. Blockchain startups and virtual asset businesses must strictly comply with the following:

3. Prevention of Unfair Trading
The Virtual Asset User Protection Act prohibits the use of non-public important information, market manipulation, and trading of self-issued coins to create a fair market environment. It strictly limits virtual asset trading using insider information to secure transparency and protect users. It also prohibits all forms of market manipulation, including disguised trading, to maintain market fairness and minimize the negative impact that startups may have on the market. Finally, it prohibits virtual asset businesses from trading or repurchasing coins they have issued themselves, signaling a major change to existing practices. These regulations are considered important steps to increase the credibility of the virtual asset market and establish a transparent and fair trading environment.

4. Customer Asset Deposit and Withdrawal Restrictions and Reporting Obligations
If a startup restricts customer virtual asset deposits and withdrawals, there must be a legitimate reason. If deposits and withdrawals are restricted due to system failures or hacking incidents, they must be reported to the Financial Supervisory Service, and efforts to maintain customer trust are essential.

Legal Issues Blockchain Startups Should Consider

* Legal Appropriateness of Business Model
While blockchain technology can be applied to various industries, startups need to review how their business model relates to specific laws, such as operating a virtual currency exchange. If you are planning to operate a virtual currency exchange, you must meet the legal requirements for AML (Anti-Money Laundering) under the “Act on Reporting and Use of Specific Financial Transaction Information.”

* Compliance with International Laws and Regulations
Given the nature of virtual assets, international transactions often occur. Startups should consider both domestic and foreign regulations to develop a global business strategy.

* User Data and Personal Information Protection
Blockchain-based applications must comply with personal information protection laws (GDPR, CCPA, etc.) and process data appropriately. Particularly in decentralized systems, the boundaries of data sovereignty and security may not be clear, so caution is needed.

The Virtual Asset User Protection Act and its subsidiary regulations present both new opportunities and challenges for blockchain startups. Law firm Veat aims to help startups meet legal requirements while successfully operating innovative businesses.

Law firm Veat’s Seongho Choi, Managing Partner, has a high degree of technical understanding due to his background in science and engineering, and has accumulated expertise as Deputy Chairman of the Korea Bar Association Blockchain TF Team and Member of the IT Blockchain Special Committee. Song Doyeong, Managing Partner, participated in the enactment of the Promotion Act on the Convergence Industry and has deep expertise in virtual assets. Ilwoon An, Partner, is an IT specialist certified by the Korea Bar Association and serves as a member of the Korea Bar Association Blockchain Special Committee, actively advising and contributing to legal issues related to blockchain technology and virtual assets. Wooseok Song, Senior Foreign Counsel, has experience as a senior legal counsel at Binance, a global virtual asset exchange, and currently serves as legal counsel for the Korea Blockchain Business Cooperative.

If you need legal assistance with virtual asset business, Virtual Asset User Protection Act, etc., please feel free to contact Law firm Veat.

Examples of cases handled are also available on Law firm Veat's blog.

- Key Points of the ‘Virtual Asset User Protection Act’ that Blockchain Startups Should Be Aware Of

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