The price of Bitcoin is displayed on a screen at the lounge of Upbit in southern Seoul, Tuesday. Yonhap

With the implementation of the Virtual Asset User Protection Act scheduled on Friday, investors are increasingly paying attention to how virtual asset exchanges are managing assets deposited there.

The new law specifies the responsibilities of institutions that manage deposits by virtual asset investors and how they should operate. Once the law takes effect, virtual asset businesses separate client deposits from their own assets and entrust them to credible institutions to handle so that the users can withdraw their assets at any time they want.

Voices have been growing both within and outside the industry that virtual asset exchanges should lead user protection for this relatively new industry to make a firm footing in the financial market. This is particularly important as exchanges are the most widely used among virtual asset-related services.

Upbit and Coinone, among the country's leading virtual asset exchanges, are thus drawing attention for their transparent deposit management system. They have been inspecting user deposits and virtual assets and publishing quarterly reports.

Upbit, for instance, had quarterly audits of user deposits and virtual assets conducted by an external accounting firm since October 2018, posting reports on notice board which is open to any user.

Its audit report in April shows Upbit holds assets equivalent to 103.15 percent of user-deposited funds and 102.82 percent of virtual assets. It also disclosed detailed asset holdings by category, enhancing transparency of the report.

Coinone also has been publishing asset audit reports since December 2021. It disclosed through its March report that its assets are equivalent to 103.2 percent of user deposits and 101.42 percent of virtual assets.

The new law also requires exchanges to keep at least 80 percent of virtual assets deposited by their customers in "cold wallets" which are safe from hacking. Cold wallet refers to the storage that operates offline, such as hardware wallets and USB storage. While they are mostly safe from hacking as they are not online, they are inconvenient for transferring assets.

A representation of the virtual cryptocurrency Bitcoin / Korea Times photo by Shim Hyun-chul

Previously, virtual asset businesses were required to store at least 70 percent of assets deposited by customers in cold wallets. The new law increases this requirement to a minimum of 80 percent, reflecting the financial authorities' determination to tackle the hacking risks preemptively.

Currently, some virtual asset businesses including Upbit are already known to be storing over 80 percent of user-deposited virtual assets in cold wallets.

In addition to complying with the cold wallet storage ratio, virtual asset businesses also should prepare safeguards for assets kept in "hot wallets." The virtual asset businesses including exchanges should subscribe to insurance or set aside reserves to be able to pay at least 5 percent of the value of the assets in the storage connected to the internet.

"With the implementation of the Virtual Asset User Protection Act nearing, many businesses are busy final checking their preparations," an official at a major virtual asset exchange said. "The whole industry is aware that it is crucial to establish a market which customers find totally safe. We will be committed to abiding by the regulations and continue efforts."