South Korean FSC updates definition of virtual assets and VASP regulations for Virtual Asset User…

South Korea Embarks on Wholesale CBDC Pilot ProgramAiming to pave the way for a future-oriented monetary infrastructure, South Korean financial agencies announced a plan on Wednesday (local time) to pilot a central bank digital currency (CBDC). This trial is designed to evaluate its practical use in real-world scenarios.The Bank of Korea (BOK), alongside the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), has been working with the Bank for International Settlements (BIS) from the inception of this project’s blueprint. Together, they plan to partner with multiple commercial banks to successfully carry out this initiative.Photo by Y K on UnsplashWholesale CBDCThe test will concentrate on a wholesale CBDC designed for transactions and settlements between financial institutions. This concept is akin to how commercial banks use reserves in their central bank accounts for transactions and settlements.Meanwhile, banks will introduce tokenized deposits for public use within the CBDC network. These payment instruments will circulate securely within the new monetary infrastructure built by the BOK and managed jointly with the FSC and the FSS.The pilot of this cutting-edge monetary infrastructure is poised to set the stage for the introduction of diverse, innovative payment and financial services that stand out from current offerings. This effort will also lay the groundwork for newer financial products, like security tokens, to be traded with greater safety and efficiency.Participation from citizensThe test aims to complete its Proof of Concept (PoC) through technical trials in simulated settings. Furthermore, a select group of citizens will be given the opportunity to engage in specific use case tests, letting them experience firsthand the advantages of the emerging digital payment methods. This project will significantly contribute to the future research and development of CBDC infrastructure.The Korean financial authorities have engaged in in-depth discussions regarding policy matters leading up to the test. To ensure alignment with existing laws, only banks will be involved in this initial phase. Decisions on expanding the test will come later, after a thorough evaluation of relevant policy considerations after the trial.The agencies will continue working to ensure that transaction tests involving citizens are conducted with sufficient user protection measures under the existing legal framework.Moreover, from the outset of the test’s preparation, the BIS offered insights from its research and development experiences with CBDC systems. In particular, members from the BIS’s Innovation Hub and the Monetary and Economic Department provided technical advice on designing and constructing a CBDC network. Stemming from their discussions, the BIS and the BOK jointly released a report highlighting the test’s importance and its intricately crafted model.This trial is a step towards identifying the best CBDC model suited for Korea’s financial and economic landscape. It’s important to note that the test doesn’t necessarily indicate a complete rollout of a CBDC or the final version of a CBDC network.Moving forward, the BOK, FSC, and FSS will form a collaborative working group. They’ll work hand-in-hand with pertinent ministries and entities, including the Ministry of Economy and Finance, to ensure a seamless execution of the test. Their technical partnership with the BIS will also remain ongoing.The selection process for a system developer began on October 4. Later this month, there will be an informational session for companies and banks engaged in the project. By the end of November, the financial authorities will unveil information regarding the banks involved and the specific use cases slated for testing. Public involvement is anticipated to start in the fourth quarter of next year.

South Korea: Crypto Exchange Execs Indicted on Manipulation ChargesA number of executives at Coinone, one of South Korea’s leading cryptocurrency exchanges, have been indicted on charges related to market manipulation.That’s according to a report published by South Korean news outlet, The JoongAng, on Monday. The complaint details no less than forty-six coins that are alleged to have been the subject of manipulation in some form. That represents one in four of the total number of coins that the exchange has enabled for trading on the platform.Photo by Burak The Weekender on PexelsFour executives indictedThe indictment lists four Coinone executives, Mr. Jeon, Mr. Kim, Mr. Ko, and Mr. Hwang. The four have been charged with employing illegal mechanisms to manipulate coin listings, resulting in the four executives profiting to the tune of 2.98 billion Korean Won, which amounts to $2.26 million dollars according to current fx exchange rates.The complaint specifies that these offenses were committed between December 2019 and November 2022. South Korean prosecutors further allege that prior to various projects obtaining a token listing on Coinone, company executives made them sign third-party market-making contracts. That in and of itself is not unusual.One of the key aspects of a new coin listing (and an ongoing listing for that matter), is the need to have sufficient liquidity in place to ensure that the coin can be traded without being susceptible to market manipulation. Low liquidity conditions open the door to bad actors moving the market relative to a particular token.Cross tradingThe indictment is far more specific in calling out illegal cross trading activity. It’s likely that these key Coinone employees would have been expecting such an indictment to land at their doors. Last week, it emerged that LUNA tokens associated with Terraform Labs’ failed Terra USD (TUSD) algorithmic stablecoin project, had been illegally cross traded on three South Korean crypto exchanges: Bithumb, GoPax and Coinone.Cross trading is the practice of trading an asset on an exchange without recording the transaction transparently on the exchange. Strictly speaking, the activity can be legitimate although most exchanges prohibit the practice as it can be used to affect market manipulation.A cross trade could be permitted in a scenario where the price is deemed to be competitive at the time that the trade takes place. While this can more easily be determined in conventional markets as the practice is covered by specific regulation, that’s not the case in most jurisdictions right now where digital asset trading is concerned. By extension, there’s a complete lack of transparency and a lack of reporting.As other market participants don’t have visibility of this type of trading activity, they are unaware as to whether a better price is available on the market or not. In an unregulated state, the practice undermines trust.In the case of Coinone, the executives enabled the practice in order to provide an illusion with regard to trading activity. That meant that trading volumes claimed were inaccurate, misleading ordinary traders and exchange users. Along with trading volume in these coins being artificially boosted, so too were token prices.In the indictment, prosecutors explicitly alleged that cross trading was being employed in an illegal manner:“This price manipulation causes misunderstandings about the trading volume and market price among general members of the exchange, and induces [service users] to participate in the coin transaction and buy the coin.”

Singapore’s Regulator Imposes 9-Year Ban on 3AC FoundersSingapore’s central bank and financial regulator, the Monetary Authority of Singapore (MAS), has handed down a nine-year prohibition order to Kyle Davies and Su Zhu, co-founders of the failed crypto hedge fund Three Arrows Capital (3AC).Photo by Swapnil Bapat on UnsplashSevere restrictionsThe penalty relates to alleged violations of the city-state’s securities laws. The prohibition order came into effect on Wednesday, carrying severe restrictions for Davies and Zhu.During this nine-year period, Davies and Zhu are prohibited from engaging in any regulated activities in Singapore. They are also barred from managing, serving as directors, or holding substantial shares in any capital market services business within the territory of Singapore.Loo Siew Yee, the Assistant Managing Director of Policy, Payments, and Financial Crime at MAS, emphasized the seriousness of the violations in a statement released by the central bank on Thursday. Yee stated:“MAS takes a serious view of Mr. Zhu’s and Mr. Davies’ flagrant disregard of MAS’ regulatory requirements and dereliction of their directors’ duties.” She further asserted that MAS would take action against senior managers who engage in such misconduct.Securities law violationsMAS’s decision to impose these sanctions on the 3AC co-founders was based on its findings of further securities law violations during investigations into 3AC and its founders. The regulatory authority accused Davies and Zhu of failing to inform MAS when 3AC hired a new business representative, providing false information to the regulator, and neglecting to establish an appropriate risk management framework.3AC’s troubles stemmed from the crypto market crash that occurred last year, triggered by the Terra ecosystem’s collapse. The hedge fund’s leveraged crypto positions exposed it to billions in loan defaults, resulting in significant financial losses. Its lack of risk management had a cascading effect in crypto. Lenders like Celsius and BlockFi had exposure to 3AC, leading to further collapses later in 2022 as a consequence.3AC’s creditors claim that the firm owes as much as $3.5 billion, and liquidators are now seeking to recover approximately $1.3 billion from Zhu and Davies, who allegedly incurred the debt when the firm was already insolvent.Regulatory reprimandsThis action by MAS follows last June’s reprimand of 3AC, which occurred just before the hedge fund filed for bankruptcy amid widely reported insolvency issues. At that time, MAS had criticized 3AC for providing false information, failing to report directorship changes involving Zhu and Davies, and exceeding the legal assets under management threshold.It’s just the latest reprimand the duo have received from a regulator this year, though. Zhu and Davies have been busy in trying to get another start-up off the ground. Earlier this year, they launched OPNX, a crypto bankruptcy claims trading platform. The venture is based out of Dubai, and the firm reported in April that it had gotten significant VC backing.Many of those that the company claimed were backing the venture disassociated themselves from those claims. The following month, the Dubai regulator, the Virtual Assets Regulatory Authority (VARA), reprimanded the OPNX founders, having issued an investor alert relative to the firm a few weeks prior to that. VARA's complaint was that the business had been operating without having acquired the appropriate licensing.