After months of clamping down and chaos, South Korea is taking a tough take a look at find out how to create a secure area for cryptocurrency to flourish whereas safeguarding buyers. Putro Harnowo stories
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outh Korean President Yoon Suk-yeol took workplace in May, the identical month because the stablecoin TerraUSD and related cryptocurrency Luna crashed, wiping billions of {dollars} of buyers’ cash from the crypto market. For a crypto-friendly president who has pledged to implement a set of insurance policies to open up Korea to blockchain innovation, it was a tough begin.
The saga continued after prosecutors didn’t find and arrest Kwon Do-hyung, the South Korean co-founder and CEO of Singapore-based Terraform Labs, the mother or father of TerraUSD and Luna. Interpol in September issued a crimson discover for him. Korean authorities ordered “Do Kwon” – as he’s finest recognized – to return his passport by 19 October or have the doc cancelled. At the time of publication, the 31-year-old was nonetheless on the run.
Do Kwon shouldn’t be the one crypto drawback that South Korea has needed to cope with. Since late final 12 months, the federal government has been cracking down on the digital asset sector, with greater than half of the crypto exchanges within the nation compelled to shut after failing to safe licences from native regulatory companies.
In September, the Korean authorities discovered USD7.2 billion of irregular international change transactions, most of which have been transferred via crypto exchanges since June. The similar month, the Korea Financial Intelligence Unit, the nation’s cash laundering watchdog, flagged 16 crypto companies for working with out registration.
Signs of a turnaround got here in late October, when the National Assembly and the Financial Services Commission (FSC) of Korea determined to prioritise laws to safeguard buyers in digital property together with cryptocurrencies, non-fungible tokens (NFTs) and others. The regulator and lawmakers intention to bolster establishments to create a greater steadiness between blockchain improvement, investor safety and market stability.
“Due to the recent plunge in cryptocurrency prices, the collapse of TerraUSD and Luna, and the recession in the non-fungible token market, the virtual asset market is experiencing a severe downturn and the government is looking to provide adequate protection for investors,” says Edward Dhong, a senior international legal professional at Yoon & Yang.
The want for defense has grown together with the recognition of digital property. The measurement of South Korea’s digital asset market was estimated at KRW55 trillion (USD42 billion) on the finish of 2021, in keeping with the Financial Services Commission, with a median of KRW11.3 trillion in each day transactions made by round 15.25 million merchants.
Despite the dimensions of crypto transactions, Dhong says the nation lacks correct rules and investor safety measures. For instance, the federal government nonetheless maintains a ban on preliminary coin choices (ICOs), suggesting that securities rules could also be utilized to the digital asset market.
“However, the current administration is optimistic about fostering new industries so long as measures like investor protection are in place and active,” says Dhong.
Ahn Chan Sik, a accomplice at HMP Law in Seoul, says that the South Korean authorities shouldn’t be in favour of fostering industries which are susceptible to extremely speculative actions and is deeply involved about shopper safety points round digital property. Regulators are particularly delicate to destructive points arising from digital property, akin to fraud, unlawful fundraising and hacking.
“If a virtual asset falls under the category of securities, it shall be subject to various regulations under the Capital Markets Act, and transactions of the virtual asset on exchanges not authorised for investment brokerage can be prohibited,” says Ahn. “In the case of the Luna incident, Korean prosecutors deemed that Luna has securities-like properties, thereby violating the Capital Markets Act.”
Korean rules governing reporting by digital asset service suppliers (VASPs), NFTs and decentralised exchanges are primarily based mostly on tips issued by monetary authorities such because the FSC and the Financial Supervisory Service, moderately than legal guidelines, says Ahn. “Therefore, the government’s policy stance on virtual assets is deeply reflected in the regulatory process.”
Because of this, Ahn sees the digital asset trade in South Korea evolving cautiously, and says digital asset companies are actively searching for authorized recommendation on all elements of their operation processes to keep away from operating into regulatory points.
Chain response
Park Jongbaek, a accomplice at Bae Kim & Lee, says the damages sustained by crypto buyers as a result of TerraUSD and Luna fallout aren’t the one causes behind the latest crypto winter. In January, the dramatic plunges in cryptocurrency Wemix and the shares of South Korean online game developer Wemade have highlighted the inadequate safety for Korean buyers.
“Wemade, the issuer of Wemix tokens, accounted the sale proceeds of Wemix as the normal sales proceeds, and prices of Wemade shares and Wemix rose together,” says Park.
Later, Wemix introduced it might be altering its remedy and reserving gross sales of Wemix as debt, in accordance with recommendation from its accountants, sending Wemade shares and the worth of Wemix sharply decrease, he says.
Investors made felony complaints in opposition to related individuals at every firm, says Park. “Negative perception of the public towards crypto assets accumulated with several incidents of hacking of exchanges, fraud, and illegal foreign exchange transactions,” he provides. “The Korean government’s positive regulation approach also could contribute to the current crypto crackdown.”
The crackdown included the strict implementation of the Anti-Money Laundering (AML) Act, which tremendously decreased the buying and selling quantity of crypto exchanges. Many VASPs grew to become extra delicate concerning the chance that they may be topic to penalties for violating related rules or felony fees.
“The government, especially the FSC, has focused mainly on investor and user protection, and financial market stability, in regulating blockchain and virtual assets by prohibitive and restrictive policies,” says Park.
“Such measures relatively disregard innovative effects that the blockchain brings,” he provides, citing sooner transactions, decrease prices and better monetary inclusion.
From a wider perspective, Kim Gye-jeong, a senior legal professional at Kim & Chang, sees the continuing crypto as a part of a world phenomenon stemming from not solely the market’s instability but additionally the financial system at a macroscopic stage.
Kim provides that the extended uncertainty over the route of the Korean regulatory regime has continued to problem firms seeking to enter or develop their operations within the Korean digital asset market.
“Companies also tend to consider the filing process and requirements to become a registered VASP under the AML Act to be burdensome, especially in this rapidly evolving industry,” says Kim. “Privacy and consumer protection obligations under Korean laws are relatively heavier than in other jurisdictions, calling for substantial localisation than other countries.”
Stepping out of the minefield
From a regulatory perspective, Dhong, of Yoon & Yang, explains that the most important concern for VASPs coming into the South Korean market is compliance with the Act on Reporting and Using Specified Financial Transaction Information (or Specified Financial Information Act), the spine of the South Korean anti-AML system, which got here into impact in March 2021.
“To conduct virtual asset services in accordance with the Specified Financial Information Act, VASPs must fulfil disclosure obligations, as well as the requirements that a VASP must observe in accordance with the AML and combating the financing of terrorism policy,” he says.
Dhong explains that VASPs should file a report back to the commissioner of the Korea Financial Intelligence Unit, which is authorised solely when the next standards have all been met: the VASP has obtained Information Security Management System certification; the VASP has entered into an settlement with a financial institution in South Korea that may subject real-name accounts; the consultant and government of the VASP aren’t in violation of any finance legal guidelines; and at the least 5 years have elapsed because the cancellation of any earlier report filed.
Previously, in 2017, the FSC introduced that every one varieties of ICOs, whatever the related know-how or terminology, have been banned. The regulatory authorities stated that coin choices have been overly speculative and will violate capital market legal guidelines. This choice was largely interpreted as the federal government’s view that they elevated the chance of monetary fraud.
However, President Yoon and his administration are searching for to cross the Digital Asset Basic Act (DABA) to guard buyers, whereas exempting tax on the income from cryptocurrency of as much as KRW50 million, says Dhong. “This new act is anticipated to encourage the inflow of funds and human resources into the cryptocurrency market in South Korea.”
To put together the DABA, the Yoon administration established a public-private activity power to start the related dialogue. Dhong says that the brand new act goals to minimise authorities intervention within the cryptocurrency market and enhance the usual of the home market to the extent of Switzerland, Hong Kong and Singapore.
Kim, of Kim & Chang, agrees that South Korea is in the course of setting a regulatory framework for the crypto trade that’s just like different nations. The regulators and lawmakers are discussing the authorized nature of varied varieties of digital property and the way they need to be handled.
“Striking the right balance among consumer protection, stability, innovation and flexibility would be the foremost goal,” says Kim. “Given the cross-border nature of this industry, multilateral co-operation should always come together.”
Among numerous payments earlier than the National Assembly that search to control the digital asset trade as an entire, the ruling party-proposed Act to Restore Fairness within the Digital Asset Market and to Create a Safe Trading Environment focuses on consumer safety and prohibition of unfair dealings within the digital asset trade.
“As of today, there are no rules that are directly applicable to tokens other than virtual assets such as NFTs,” says Kim. “However, the financial regulatory authorities have indicated that existing laws and regulations such as the Financial Investment Services and Capital Markets Act (FSCMA) and the AML Act can be applied, depending on the nature of the concerned tokens.”
Ahn, of HMP Law, additionally sees that the DABA goals to determine a complete regulatory system particular to digital property in consideration of the character of digital property, and to foster and revitalise digital asset companies whereas establishing concrete measures to guard buyers.
However, Ahn says that because the DABA is simply on the proposal stage and it might be a very long time earlier than it turns into legislation, the FSC intends to control digital property via current rules such because the Capital Markets Act, the Electronic Financial Transactions Act and the Specific Financial Information Act, in addition to tips.
One of the rules within the making, in keeping with Chloe Lee, a accomplice at Lee & Ko in Seoul, known as the Guidelines on Security Tokens, which is predicted to offer the factors to categorise sure digital tokens as securities, and the issues and rules to be utilized to their issuance and associated companies.
“The FSC announced that it would announce the Guidelines on Security Tokens in the fourth quarter of this year, and afterwards it will further establish the framework for the regulation of security tokens through amendment of the FSCMA and other laws,” says Lee.
The approach forward
In a bid to strike a steadiness between innovation, shopper safety and monetary stability within the crypto trade, President Yoon plans to permit ICOs into South Korea, and to determine the Digital Industry Promotion Agency, which can be devoted to digital asset affairs.
The administration of former president Moon Jae-in introduced plans to make sure cryptocurrency transactions taxable from 1 January 2023, however the Yoon administration proposed pushing again the efficient taxation date to 2025, and the Ministry of Economy and Finance has revealed proposals to this impact.
“The timing of taxation on the capital gains from the transfer of virtual assets has recently been postponed for two years,” says Dhong, of Yoon & Yang. “However, it is unclear whether the virtual assets that are being mined, or cryptocurrency hard forks [which were created from radical change to the protocols of a blockchain network], or airdrops [which were distributed for free, mostly for promotional purposes] are subject to this tax scheme, thus posing barriers for stakeholders to make investment and business plans.”
Dhong says that the general public notion of abusive actions by crypto firms has created uncertainty over whether or not these measures can be rolled out inside due course. To shield buyers, the Korea Digital Asset Business Association may even set up and announce tips that asset operators should observe. These tips are anticipated to represent the route of presidency regulation sooner or later.
“The current administration is optimistic about fostering new industries so long as measures like investor protection are in place and active,” says Dhong.
“The enactment of the DABA and the establishment of related agencies should be followed closely.”
Apart from VASP reporting and securities rules within the Korean digital asset trade, Ahn, of HMP Law, says that companies must also take note of play-to-earn sport regulation.
In play-to-earn video games, gamers are awarded crypto or NFTs as they progress all through the sport, which could be bought via marketplaces and crypto exchanges. Move-to-earn video games, in distinction, reward customers for participating in bodily actions akin to jogging, strolling and different actions that contain taking steps.
“The Game Rating and Administration Committee [South Korea’s video game content rating board] refuses to give a rating for play-to-earn games, which is a necessary procedure for games to be distributed due to their speculative nature, and effectively bans play-to-earn games in Korea, whereas move-to-earn games are allowed,” says Ahn.
He provides that the South Korean authorities additionally shortly ready and handed a invoice on the journey rule on digital property, which mandates monetary establishments to gather, retailer and share the private information of senders and recipients of cryptocurrencies in a transaction of greater than KRW1 million. The journey rule-related provisions of the Financial Information Act took impact on 25 March, and main crypto exchanges in South Korea are taking measures akin to implementing white checklist and journey rule options.
“However, as no specific guidelines have been prepared yet, major crypto exchanges in Korea are having trouble preparing travel rule solutions between blockchain solutions and non-blockchain solutions,” says Ahn.
“The financial authorities in Korea have formed a taskforce team and have been working on a plan to improve the travel rule,” he says, including that South Korean monetary authorities are main the way in which in implementing journey guidelines, and the eventual legal guidelines and tips could assist different nations in getting ready such rules.
Lessons realized
If there are any classes realized that the enterprise has taken word of through the latest crackdown, Park, of Bae Kim & Lee, factors out that the absence of tips for buyers issued by the supervising authority has resulted in substantial blind spots on investor schooling and safety.
“Unclear and/or too strict regulation could bring negative impacts on the growth of the blockchain industry by driving Korean companies using blockchain technology or conducting blockchain-based game businesses out of Korea,” says Park.
He says that the federal government must handle and management the dangers posed by the digital asset ecosystem via rules, however on the similar time wants to determine a system to advertise progressive results based mostly on recognition that the digital property and their associated providers might presumably develop into a significant trade.
“Considering the rapid growth and change of the market, the minimum regulatory framework should be announced as soon as possible to be effective and valid,” he provides.
Through the brand new regulation to return into play, Lee, of Lee & Ko, sees the regulatory framework of digital property can be a lot clearer, which can give extra readability to the businesses planning to enter or develop their operation into South Korea’s digital asset market.
“There will certainly be more regulation than before on virtual assets, which will change the current landscape of the market, and it will affect such companies as well,” says Lee.
While particulars of the rules, akin to subordinate guidelines of the brand new legislation, are being ready, companies involving digital property that may be categorized as securities, or of property that can be topic to extra stringent regulation, will seemingly not be began, says Lee, “and such a period may not be that short”.
Lee notes that since many extra digital property may be categorized as securities, earlier enterprise fashions could have to be adjusted. In addition, the legislation by nature could not outline or stipulate each element and a few interpretation will nonetheless be required, which can trigger some regulatory uncertainty and threat.
Additionally, the South Korean authorities has labored on boosting blockchain innovation, akin to organising a regulatory sandbox for progressive blockchain providers and the Bank of Korea’s pilot checks to introduce the central financial institution digital currencies whereas on the similar time deterring or banning speculative or felony actions.
South Korea additionally has amended the AML Act and the Specified Financial Information Act in accordance with the Financial Action Task Force’s steering for a risk-based method to digital property and VASPs.
“The Korean government is working on setting a clearer regulatory framework for digital assets,” says Lee. “These steps are in good order, in line with the global regulatory direction. We will see how the regulatory framework for blockchain technology will be shaped in greater detail in the near future.”
