South Korea’s crypto firms will have to self-regulate under new guidance

South Korean securities firms and token issuers now have some clarity on how security tokens are defined under new guidance published Monday.

South Korea’s Financial Services Commission has defined security tokens as tokens digitized using distributed ledger technology, bringing the country in line with other jurisdictions in the Asia region.

Under this guidance, it will first be up to the companies to regulate themselves.

“South Korea’s approach to tying the scope of security token offerings back to the definition of securities is broadly in line with other regulators such as Singapore and Hong Kong,” said Angela Ang, senior policy advisor at blockchain intelligence firm TRM Labs and a former regulator at Monetary Authority of Singapore.

The regulatory clarity “should encourage digital asset innovation in South Korea’s capital markets,” Ang said.

Before the guidance was issued, traditional investment firms had been wary of entering the market.

“The basic stance that securities law might apply to tokens was similar [to the U.S.]”, said Mooni Kim, foreign lawyer at law firm Kim & Chang. “The question of ‘How?’ always followed.”

Players in traditional finance who already have securities licenses are already responding. One is Shinhan Investment and Securities, one of the country’s largest securities companies, which has invited other companies to join an alliance to inform investors about the benefits of token securities and set standards and best practices for issuance and trading.

“Securities firms seem to have some hope about it, but I don’t think it will affect our business that much,” said a crypto exchange executive who spoke on condition of anonymity to preserve relations with local regulators. He said he did not see the guidance as a sign that regulators were encouraging the crypto industry.

“Securities are already available in the securities market,” he said. “Perhaps precisely defining the asset types should come first.”

“It’s good for investors,” this executive said of the guidance, because “the Korea Securities Depository will control the total amount of issued assets and keep an eye on token issuers.”

Last year, South Korean gaming company Wemade made a false disclosure about the number of Wemix tokens it issued, prompting major crypto exchanges to remove Wemix.

Lawmakers will next reshape key existing laws to cover security tokens. The supervisory authorities will propose changes to the Capital Markets Act and the Act on Electronic Securities, which will be submitted to the National Assembly in the first half of this year.

Following the collapse of the Terra system’s UST stablecoin last year, South Korea’s regulators have been working towards tougher protections for consumers and drafting a regulatory framework for the crypto industry, which will eventually take shape in the Digital Asset Basic Act.

Nevertheless, companies will take the first step by regulating themselves. The guidance requires interested parties, such as issuers and brokers, to determine whether or not a token is a security.

Crypto players need to go through their own classification and assess their related tokens to see if they need to come forward to be regulated under the securities regime, Kim said.

Companies that do not have securities-related licenses will have to go through the process of obtaining licenses that can take one to two years, depending on the licenses and the business model of the company.

Ang expects to see growing pains as businesses and regulators come to an agreement on what is and is not a security.

Still, “FSC provides detailed guidance to inform that decision and will likely consider each decision on a case-by-case basis,” Ang said.