South Korea Weighs Confiscating Investment Principal for Crypto Insider Trading

South Korea’s financial authorities are reviewing a plan to confiscate investors’ principal in virtual-asset trades that use nonpublic information.

According to the financial industry on April 11, the Financial Services Commission is considering adding the use of nonpublic information in crypto trading to the list of offenses subject to principal confiscation. The Financial Supervisory Service recently submitted related recommendations to the FSC, and authorities are coordinating whether to establish a legal basis for the measure.

The Virtual Asset User Protection Act, currently in force, provides for principal confiscation only in cases of fraudulent unfair trading and market manipulation. Trading on nonpublic information is punishable, but there is no legal basis requiring confiscation of the original investment.

In the stock market, by contrast, principal confiscation is allowed for all unfair-trading offenses. The government’s recently announced measures to improve the capital market structure also call for revising the Capital Markets Act to explicitly allow principal confiscation when the use of nonpublic information is detected. Crypto-market regulation may be strengthened to a similar level.

Still, some have urged caution given the crypto market’s distinct characteristics. Because the market has no legal disclosure requirement, it is difficult to define the scope of nonpublic information. Data from the Financial Supervisory Service’s virtual-asset unfair-trading reporting center showed that 78% of reports involved market manipulation, the largest share. Reports involving the use of nonpublic information accounted for just 7%.

A financial-authorities official said regulators would select rule categories that reflect the characteristics of the crypto market. Details of the phase-two legislation have not been finalized, the official added.