South Korea is one of the most technologically advanced and digitally connected countries in the world, with a strong interest and enthusiasm for emerging technologies such as blockchain and digital assets. The country has a large and active digital asset market, with millions of users and billions of dollars in trading volume. However, the regulatory landscape for digital assets in South Korea is still evolving and facing some challenges.
One of the main issues is the lack of a clear and consistent definition and taxonomy for digital assets. The term “digital asset” is often used interchangeably with “virtual asset” or “cryptocurrency”, but these terms may have different meanings and implications in different contexts and jurisdictions. For example, the Financial Services Commission (FSC), the top financial regulator in South Korea, recently published guidelines on which blockchain-based tokenized assets will be treated and regulated as securities under its capital markets rules.
The FSC said that digital assets that provide a stake in the operation of a business, promise future profits or dividends, or represent ownership or rights in an underlying asset or project will be considered security tokens (STOs) and subject to securities regulations. However, the FSC also said that virtual assets or cryptocurrencies should not be termed “digital assets”, as they are different from tokenized securities.
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This distinction may create confusion and uncertainty for digital asset service providers (VASPs) and users, as they may not be sure which category their digital assets fall under and what rules they need to comply with. Moreover, the FSC’s guidelines may not be aligned with global best practices or standards, such as the Financial Action Task Force (FATF)’s recommendations on virtual assets and VASPs, which use a broader definition of virtual assets that includes both payment tokens and security tokens.
Another issue is the balance between innovation and risk management in the digital asset sector. In March 2020, the South Korean Parliament passed an amendment to the Act on the Reporting and Use of Specific Financial Transaction Information, which came into effect a year later, extending licensing requirements to VASPs.
The amendment aims to ensure consumer protection and prevent money laundering and terrorism financing in the digital asset industry. However, the amendment also imposes strict conditions and obligations on VASPs, such as obtaining information security certification, partnering with banks for real-name verification of customers, reporting transactions to the Korea Financial Intelligence Unit (KoFIU), and obtaining approval from local authorities.
These requirements have proven to be difficult and costly for many VASPs to meet, resulting in only five entities obtaining full licenses so far, while over 60 entities have had to cease operations altogether. The amendment has also discouraged some traditional financial institutions from dealing with digital assets, fearing regulatory scrutiny or sanctions.
The FSC has recently declared its support for digital assets amid the crackdowns, saying that it will promote the use of digital currency and safeguard the interest of investors. The FSC also said that it will revise the Digital Asset Basic Act (DABA), which is expected to be in force in 2023 and is poised to be the leading regulation for South Korea’s burgeoning digital asset industry. The DABA aims to provide a clear legal framework and policy direction for digital assets, while fostering innovation and growth in the sector.
The future of digital assets in South Korea depends largely on how the regulators and policymakers will address these issues and establish regulatory clarity and certainty for the industry. South Korea has the potential to be a leader in the region and globally in terms of adoption and regulation of digital assets, but it needs to adopt a clear taxonomy for digital assets aligned with global standards, balance innovation and risk management in the sector, and provide a supportive environment for VASPs and users.
