South Korean lawmakers join their counterparts in the US and Europe in accepting that cryptocurrencies and other digital assets are here to stay and therefore regulations are needed to handle this new class of investment.
Welcome to the Basic Law of Digital Assets.
The legislation is not unexpected as South Korean President Yoon Suk-yeol addressed 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 risks in digital asset trading.
“Virtual assets are anticipated to accelerate financial innovation, but there are also concerns that they pose risks to investor protection and market stability,” FSC Chairman Kim Joo-hyun told the National Assembly. of the country last week. “[The FSC] will actively participate in legislation so that the virtual asset market can grow responsibly based on investor confidence,” he said.
The South Korean government informed local media outlets that it will take note of crypto regulations from the US and other countries when crafting its legislation, specifically mentioning reports to be issued from various US executive branches. in October, following the executive order of US President Joe Biden. on digital assets.
Of South Korea’s population of 51 million people, an estimated 5.6 million trade on its digital asset market, which in 2021 was valued at more than 55 trillion Korean won ($42 billion), according to the Korean Financial Intelligence Unit (KoFIU).
state of affairs
Currently, South Korea’s regulations on cryptocurrencies comprise an amendment to the Law on the Reporting and Use of Certain Financial Transaction Information, which requires cryptocurrency trading platforms to acquire an information security certificate and provide users accounts with real names.
This came into effect in September 2021, with the aim of reducing the risks of money laundering, embezzlement and price manipulation by prohibiting anonymous trading.
The new Basic Law of Digital Assets will emerge from 13 proposals to be debated in the National Assembly.
“The Basic Law of Digital Assets is now in the investigation stage and we hope to show palpable 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: Crypto Crackdown in South Korea: What You Need to Know
President Yoon Suk-yeol, who began his term in May this year, said early on that he would classify cryptocurrencies in two ways: tokens that resemble securities and non-securities.
Tokens that function as securities, such as digital assets signifying ownership of company shares or property, will be regulated by the existing Capital Markets Law, Yoon said.
Tokens that are not securities, or utility tokens that have functions other than an investment mode, will be supervised under the new Basic Law to offer better guarantees to investors.
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 that will be regulated by the Commodity Futures and Trading Commission.
“Digital assets have the attributes of a financial and tangible asset,” said Kang Seong-hoo, president of the Korea Digital Asset Service Providers Association. Forkast. “Therefore, a certain level of strict scrutiny should be imposed to allow investors to invest with confidence and minimize [unfair trades] in the market.”
So what is the Digital Assets Basic Law expected to do?
Current proposals for the Basic Law focus on oversight of virtual asset service providers (VASPs): they include forcing crypto firms to store customer funds separately from corporate funds to avoid any risk of misappropriation .
Most of the bills were proposed last year, but while they were being reviewed in the National Assembly, the local crypto project Terra-LUNA collapsed, evaporating a $40 billion market capitalization in a matter of days. South Korea estimates that around 280,000 local investors lost money in the debacle.
See related article: Marked by Terra-LUNA, South Korea pushes ahead with digital asset reform
After Terra-LUNA, the Digital Assets Basic Law began to focus more on managing the issuance and listing of cryptocurrencies and better protections for investors.
“First of all, (set) a standard for crypto projects and exchanges when issuing and listing the token,” Kang said at the Korea Association of Digital Asset Service Providers. “What follows is [regulation] on disclosure, that would be the basis for investors to make investment decisions.”
Kang said that the standards surrounding the inclusion, exclusion and disclosure of information in cryptocurrencies remain opaque.
“What kind of situation causes a token to be designated as a risky asset and what limit does it have to reach to be delisted? The Digital Assets Basic Law should address that,” 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 companies, said Kim Hyoung-joong, president of the Korea Fintech Society. Forkast.
“[Companies] worrying about launching new services only to be disapproved by the FSC, or even penalized,” Kim said. “So there has to be a safety net that can eliminate those [fears].”
Kim added that in addition to basic standards needed to safeguard investors, South Korea should adopt a sandbox-like regulatory framework that allows innovative projects to flourish.
“Regulations should be minimal – use them to stop embezzlement, money laundering and other crimes,” Kim said. “Regulation is not a good tool to promote an industry. Therefore, the government must also think about making large investments to build the industry.”