S.Korea’s all-encompassing crypto law – what we know so far

South Korean lawmakers are joining counterparts in the US and Europe in accepting that cryptocurrencies and other so-called digital assets are here to stay, and therefore regulations are needed to deal with this new investment class.

Welcome to the Digital Asset Basic Act.

The legislation is not unexpected as South Korean President Yoon Suk-yeol raised the need for new laws during his campaign for the top job in January. The Financial Services Commission (FSC), the country’s financial regulator, also supports the need for rules to manage risk in digital asset trading.

“There is expectation that virtual assets will accelerate financial innovation, but also concerns that they pose a risk to investor protection and market stability,” the head of the FSC, Kim Joo-hyun, told the country’s National Assembly last week. “[The FSC] will participate actively in the legislation so that the virtual asset market can grow responsibly based on investor confidence, he said.

South Korea’s government informed local media that it will take note of crypto regulations from the US and other countries when drafting its legislation – specifically mentioning the reports that will be issued by various executive branches in the US in October, following US President Joe Biden’s executive order. on digital assets.

Of South Korea’s population of 51 million people, an estimated 5.6 million trade in the digital asset market, which by 2021 was valued at more than 55 trillion Korean won ($42 billion), according to the Korea Financial Intelligence Unit (KoFIU).

Status

Currently, South Korea’s cryptocurrency regulations include an amendment to The Act on Reporting and Use of Certain Financial Transaction Information, which mandated crypto trading platforms to acquire an information security certificate and provide users with real-name accounts.

This came into full effect in September 2021, with the aim of reducing the risk of money laundering, embezzlement and price manipulation by banning anonymous trading.

The new constitution on digital values ​​will emerge from 13 proposals to be considered in the National Assembly.

“The Digital Asset Basic Act is now at the research stage, and we expect to show tangible results [on the legislation] from the end of this year to the first half of 2023, Jeong Jae-wook, a member of the ruling party’s virtual assets committee, said in June.

See related article: South Korea’s Crypto Crash: What You Need to Know

President Yoon Suk-yeol, who started his term in May this year, said at the outset that he would classify cryptocurrencies in two ways – tokens that resemble securities and non-securities.

Tokens that act as securities, such as digital assets that signify ownership of a company share or a property, will be regulated under the existing Capital Markets Act, Yoon said.

Tokens that are not securities, or tokens that have functions other than as a means of investment, will be monitored under the new constitution to give investors better protection.

This mirrors the debate taking place in the US, with a bill being proposed in the Senate to treat most cryptocurrencies as a type of commodity to be regulated by the Commodities Futures and Trading Commission.

“Digital assets have both a financial and a material asset,” Kang Seong-hoo, president of the Korea Digital Asset Service Provider Association, told Discard. “So some level of rigorous scrutiny needs to be imposed to allow investors to invest with ease and minimize [unfair trades] on the market.”

What’s inside

So what is the Digital Asset Basic Act expected to do?

The current proposals for the constitution focus on supervision of virtual asset providers (VASP) – they include obliging crypto companies to store customer funds separately from company funds to prevent the risk of embezzlement.

Most of the bills were proposed last year, but while they were being reviewed in the National Assembly, homegrown crypto project Terra-LUNA collapsed, evaporating $40 billion in market capitalization in a matter of days. South Korea estimates that around 280,000 local investors lost money in the debacle.

See related article: Spurred by Terra-LUNA, South Korea moves ahead with digital asset reform

After Terra-LUNA, the Digital Asset Basic Act began to focus more on the governance of the issuance and listing of cryptocurrencies and better protection for investors.

“First of all, (set) a standard for crypto projects and exchanges in issuing and listing the token,” said Kang of the Korea Digital Asset Service Provider Association. “What will follow is [regulation] on disclosure that will be the basis for investors making investment decisions.”

Kang said standards around listing, delisting and information disclosure in cryptocurrencies remain opaque.

“What kind of situation causes a token to be designated as a risky asset and what threshold does it have to reach to be delisted? The Digital Asset Basic Law should address this, Kang said. The head of the FSC confirmed at the National Policy Committee meeting last week that the law will institutionalize standards for issuing, listing and preventing unfair trade.

Pushing for a strict standard will bring clarity to both investors and businesses, Kim Hyoung-joong, the president of the Korea Fintech Society, told Discard.

“[Companies] worry about launching new services only to be rejected by the FSC, or even penalized,” Kim said. “So there needs to be a safety net that can eliminate these [fears].”

Kim added that aside from the basic standards needed to protect investors, South Korea should adopt a sandbox-like regulatory framework that allows innovative projects to flourish.

“Regulations must be at a minimum – use them to stop embezzlement, money laundering and other crimes,” Kim said. “Regulation is not a good tool for promoting an industry. So the government also needs to think about making big investments to build the industry.”