Key Takeaways:
South Korea’s Virtual Asset User Protection Act takes effect on July 19, mandating that banks entrusted by cryptocurrency exchanges must pay interest on cash deposits. This law is expected to significantly impact K-Bank, the digital bank partnered with Upbit (Korea’s largest exchange), as it faces substantial interest payouts that could affect its IPO valuation. The act also outlines regulations for virtual asset custody, incident liability, and transaction monitoring.
Banks Required to Pay Interest on Exchange-Held Cash
One of the 19 provisions in the Virtual Asset User Protection Act introduces a critical change: banks must pay interest on user deposits (KRW cash) held via exchanges.
- Impact on K-Bank: Upbit’s partner bank currently holds 5 trillion KRW ($36 billion) in Upbit-related deposits, representing 20%+ of its total customer balance.
- Projected Costs: At a 1% interest rate (aligned with Korean securities firms’ deposit rates), K-Bank would owe ~500 billion KRW ($36 million) annually—nearly matching its Q1 2024 net profit.
👉 How will this reshape Korea’s crypto banking landscape?
IPO Implications:
K-Bank’s planned 2024 IPO may face valuation challenges due to the new financial burden. Other Korean banks hold minimal virtual asset deposits, limiting broader industry fallout.
Bank Profitability:
Experts speculate banks might offset costs by investing托管现金 (custodied cash), but feasibility remains unclear without further details.
Key Provisions of the Virtual Asset User Protection Act
The FSC’s 2023 legislative notice clarified the act’s enforcement, including:
- Exemptions: CBDC-linked tokens and certain NFTs excluded.
- Deposit Management: Rules for user fund custodians and operations.
- Cold Wallet Rule: 80% of user assets must be stored offline.
- Insurance/Reserves: Standards for hacking/technical failure liability.
- Insider Trading: Defines timelines for "material non-public information" leaks.
- Withdrawal Freezes: Bans arbitrary freezes, with exceptions specified.
- Market Surveillance: Exchanges must monitor abnormal trading and penalize misconduct.
FAQ Section
Q: How will the 1% interest rate affect Upbit’s profitability?
A: Upbit earned ~500 billion KRW from uninterest-bearing deposits; now, these funds may flow to users via K-Bank, pressuring Upbit’s revenue.
Q: Could other exchanges face similar challenges?
A: Upbit dominates Korea’s market, so smaller exchanges’ banking partners hold fewer deposits, reducing immediate impact.
Q: What’s the global precedent for crypto deposit interest?
A: Few jurisdictions mandate interest on exchange-held cash, making Korea a regulatory pioneer.
👉 Explore crypto regulations worldwide
Final Note:
This law marks a milestone in investor protection, but its financial ripple effects—particularly for banks and exchanges—warrant close monitoring. Stakeholders should prepare for liquidity shifts and new compliance costs.