Risk review related to virtual asset liquidity supply service contracts in accordance with the implementation of the Virtual Asset User Protection Act.

Law firm Veat reviewed the legal risks in entering into a virtual asset liquidity supply service agreement at the request of virtual asset issuing company A (hereinafter referred to as "the client").

Law firm Veat comprehensively reviewed the legal risks when entering into a service agreement for the purpose of providing liquidity or market making for a specific virtual asset in the virtual asset market.

While confirming the specific conditions of the liquidity supply service agreement, which is written in the format of a token lending agreement, we explained the financial authority's position on market making in the virtual asset market and the relevant provisions of the 「Act on the Protection of Virtual Asset Users」 (hereinafter referred to as "Virtual Asset User Protection Act"), which is scheduled to take effect on July 19, 2024 (2024. 7. 19.), and detailed information on the legal risks associated with entering into the service agreement.

Reasons to seek legal advice regarding virtual asset supply

It is common for virtual asset liquidity supply service agreements to be written in the format of token lending agreements or token investment agreements, and it is necessary to identify the legal risks that may arise when entering into such agreements.

Regardless of the format of the agreement, if the essence of the transaction is a service agreement for virtual asset liquidity supply, it is necessary to review whether ① market-making activities in the virtual asset market are permitted and ② whether requesting market-making activities through the service agreement poses a problem.

Liquidity providing in the virtual asset market refers to providing bid and ask quotes for a virtual asset by utilizing the holdings of a specific market participant to avoid situations where users holding the virtual asset cannot readily trade it at an appropriate price or time due to insufficient circulation or trading volume of the specific virtual asset in the virtual asset market. This is also called virtual asset market making, and it is expected to play a positive role in reducing transaction costs and inducing stable price formation in the virtual asset market, thereby enhancing the convenience of users, and is becoming a common practice in the global virtual asset market.

Market manipulation in the stock market is prohibited as an unfair act under the 「Act on Capital Markets and Financial Investment Business」， but liquidity providing acts, which aim to “protect investors through stable price formation,” may be permitted.

Therefore, even if not directly conducting liquidity providing (market making), if requesting liquidity providing services through a service agreement, investment agreement, or token investment agreement, it is desirable to review and confirm the applicable risks under domestic laws such as the Virtual Asset User Protection Act to prevent future legal risks.

When entering into a virtual asset liquidity supply service agreement or other agreements related to virtual assets, various laws and regulations, including the Virtual Asset User Protection Act, may apply, so we recommend seeking the assistance of Law firm Veat, which has high expertise in blockchain and virtual asset regulations, to review and minimize legal risks.

Law firm Veat provides professional legal advice regarding virtual assets and blockchain businesses and supports the entire process of blockchain and virtual asset business, including contract condition review, legal risk review, and contract negotiation support.

Law firm Veat's Senior Partner Choi Seong-ho, Senior Partner Song Do-young, and Partner An Il-woon have been appointed as members of the IT Blockchain Committee of the Korean Bar Association, and Song Woo-seok, Senior Foreign Counsel who served as Senior Counsel at Binance, is active as a legal advisor to the Korea Blockchain Business Cooperative.

If you require legal advice regarding blockchain, virtual assets, virtual asset liquidity supply, or the Virtual Asset User Protection Act, please contact Law firm Veat at any time.

Thank you.
Law firm Veat