Korea takes hard look at creating safe space for cryptocurrency

After months of clamping down and chaos, South Korea is taking a hard look at the right way to create a safe space for cryptocurrency to flourish whereas safeguarding traders. Putro Harnowo reviews

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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 traders’ 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 did not find and arrest Kwon Do-hyung, the South Korean co-founder and CEO of Singapore-based Terraform Labs, the guardian of TerraUSD and Luna. Interpol in September issued a crimson discover for him. Korean authorities ordered “Do Kwon” – as he’s finest identified – 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 take care of. Since late final yr, 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 overseas change transactions, most of which have been transferred by crypto exchanges since June. The identical 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 traders in digital property together with cryptocurrencies, non-fungible tokens (NFTs) and others. The regulator and lawmakers goal to bolster establishments to create a greater stability between blockchain growth, investor safety and market stability.

“Due to the latest plunge in cryptocurrency costs, the collapse of TerraUSD and Luna, and the recession within the non-fungible token market, the digital asset market is experiencing a extreme downturn and the federal government is trying to present satisfactory safety for traders,” says Edward Dhong, a senior overseas lawyer at Yoon & Yang.

The want for safety has grown together with the recognition of digital property. The dimension of South Korea’s digital asset market was estimated at KRW55 trillion (USD42 billion) at the top of 2021, in accordance with the Financial Services Commission, with a mean of KRW11.3 trillion in every day transactions made by round 15.25 million merchants.

Despite the dimensions of crypto transactions, Dhong says the nation lacks correct laws and investor safety measures. For instance, the federal government nonetheless maintains a ban on preliminary coin choices (ICOs), suggesting that securities laws could also be utilized to the digital asset market.

“However, the present administration is optimistic about fostering new industries as long as measures like investor safety are in place and energetic,” says Dhong.

Ahn Chan Sik, a companion at HMP Law in Seoul, says that the South Korean authorities shouldn’t be in favour of fostering industries which might be vulnerable to extremely speculative actions and is deeply involved about client safety points round digital property. Regulators are particularly delicate to adverse points arising from digital property, akin to fraud, unlawful fundraising and hacking.

“If a digital asset falls beneath the class of securities, it shall be topic to numerous laws beneath the Capital Markets Act, and transactions of the digital asset on exchanges not authorised for funding brokerage will 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 laws governing reporting by digital asset service suppliers (VASPs), NFTs and decentralised exchanges are primarily primarily based on pointers issued by monetary authorities such because the FSC and the Financial Supervisory Service, somewhat than legal guidelines, says Ahn. “Therefore, the federal government’s coverage stance on digital property is deeply mirrored within the regulatory course of.”

Because of this, Ahn sees the digital asset trade in South Korea evolving cautiously, and says digital asset companies are actively in search of authorized recommendation on all facets of their operation processes to keep away from working into regulatory points.

Chain response

Park Jongbaek, a companion at Bae Kim & Lee, says the damages sustained by crypto traders as a result of TerraUSD and Luna fallout should not 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 traders.

“Wemade, the issuer of Wemix tokens, accounted the sale proceeds of Wemix as the traditional gross sales proceeds, and costs of Wemade shares and Wemix rose collectively,” says Park.

Later, Wemix introduced it will 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 legal complaints in opposition to related individuals at every firm, says Park. “Negative notion of the general public in the direction of crypto property amassed with a number of incidents of hacking of exchanges, fraud, and unlawful overseas change transactions,” he provides. “The Korean authorities’s constructive regulation method additionally might contribute to the present crypto crackdown.”

The crackdown included the strict implementation of the Anti-Money Laundering (AML) Act, which significantly lowered the buying and selling quantity of crypto exchanges. Many VASPs grew to become extra delicate concerning the risk that they could be topic to penalties for violating related laws or legal fees.

“The authorities, particularly the FSC, has centered primarily on investor and person safety, and monetary market stability, in regulating blockchain and digital property by prohibitive and restrictive insurance policies,” says Park.

“Such measures comparatively disregard progressive results that the blockchain brings,” he provides, citing quicker transactions, decrease prices and larger monetary inclusion.

From a wider perspective, Kim Gye-jeong, a senior lawyer at Kim & Chang, sees the continuing crypto as a part of a worldwide phenomenon stemming from not solely the market’s instability but in addition the financial system at a macroscopic degree.

Kim provides that the extended uncertainty over the course of the Korean regulatory regime has continued to problem firms trying to enter or increase their operations within the Korean digital asset market.

“Companies additionally have a tendency to think about the submitting course of and necessities to turn into a registered VASP beneath the AML Act to be burdensome, particularly on this quickly evolving trade,” says Kim. “Privacy and client safety obligations beneath Korean legal guidelines are comparatively heavier than in different jurisdictions, calling for substantial localisation than different nations.”

Stepping out of the minefield

From a regulatory perspective, Dhong, of Yoon & Yang, explains that the most important concern for VASPs getting 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 digital asset companies in accordance with the Specified Financial Information Act, VASPs should fulfil disclosure obligations, in addition to the necessities {that a} VASP should observe in accordance with the AML and combating the financing of terrorism coverage,” he says.

Dhong explains that VASPs should file a report back to the commissioner of the Korea Financial Intelligence Unit, which is permitted 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 problem real-name accounts; the consultant and government of the VASP should not in violation of any finance legal guidelines; and at least 5 years have elapsed because the cancellation of any earlier report filed.

Previously, in 2017, the FSC introduced that each one sorts 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 in search of to cross the Digital Asset Basic Act (DABA) to guard traders, whereas exempting tax on the income from cryptocurrency of as much as KRW50 million, says Dhong. “This new act is anticipated to encourage the influx of funds and human assets into the cryptocurrency market in South Korea.”

To put together the DABA, the Yoon administration established a public-private job drive to start the related dialogue. Dhong says that the brand new act goals to minimise authorities intervention within the cryptocurrency market and improve 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 assorted sorts of digital property and the way they need to be handled.

“Striking the suitable stability amongst client safety, stability, innovation and suppleness can be the foremost objective,” says Kim. “Given the cross-border nature of this trade, multilateral co-operation ought to all the time come collectively.”

Among a variety of payments earlier than the National Assembly that search to manipulate 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 person safety and prohibition of unfair dealings within the digital asset trade.

“As of immediately, there are not any guidelines which might be instantly relevant to tokens aside from digital property akin to NFTs,” says Kim. “However, the monetary regulatory authorities have indicated that current legal guidelines and laws such because the Financial Investment Services and Capital Markets Act (FSCMA) and the AML Act will be utilized, relying on the character of the involved 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 traders.

However, Ahn says that because the DABA is barely at the proposal stage and it might be a very long time earlier than it turns into legislation, the FSC intends to manage digital property by current laws such because the Capital Markets Act, the Electronic Financial Transactions Act and the Specific Financial Information Act, in addition to pointers.

One of the rules within the making, in accordance with Chloe Lee, a companion at Lee & Ko in Seoul, is known as the Guidelines on Security Tokens, which is anticipated to offer the standards to categorise sure digital tokens as securities, and the concerns and laws to be utilized to their issuance and associated companies.

“The FSC introduced that it will announce the Guidelines on Security Tokens within the fourth quarter of this yr, and afterwards it’ll additional set up the framework for the regulation of safety tokens by modification of the FSCMA and different legal guidelines,” says Lee.

The approach forward

In a bid to strike a stability between innovation, client 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 will probably 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 printed proposals to this impact.

“The timing of taxation on the capital good points from the switch of digital property has lately been postponed for two years,” says Dhong, of Yoon & Yang. “However, it’s unclear whether or not the digital property which might be 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 topic to this tax scheme, thus posing boundaries for stakeholders to make funding and enterprise plans.”

Dhong says that the general public notion of abusive actions by crypto firms has created uncertainty over whether or not these measures will probably be rolled out inside due course. To defend traders, the Korea Digital Asset Business Association will even set up and announce pointers that asset operators should comply with. These pointers are anticipated to represent the course of presidency regulation sooner or later.

“The present administration is optimistic about fostering new industries as long as measures like investor safety are in place and energetic,” says Dhong.

“The enactment of the DABA and the institution of associated companies ought to be adopted intently.”

Apart from VASP reporting and securities laws within the Korean digital asset trade, Ahn, of HMP Law, says that companies must also take note of play-to-earn recreation regulation.

In play-to-earn video games, gamers are awarded crypto or NFTs as they progress all through the sport, which will be bought by 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 present a ranking for play-to-earn video games, which is a needed process for video games to be distributed as a result of their speculative nature, and successfully bans play-to-earn video games in Korea, whereas move-to-earn video 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 non-public 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 record and journey rule options.

“However, as no particular pointers have been ready but, main crypto exchanges in Korea are having hassle getting ready journey rule options between blockchain options and non-blockchain options,” says Ahn.

“The monetary authorities in Korea have shaped a taskforce crew and have been engaged on a plan to enhance the journey 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 pointers might assist different nations in getting ready such laws.

Lessons discovered

If there are any classes discovered that the enterprise has taken be aware of throughout the latest crackdown, Park, of Bae Kim & Lee, factors out that the absence of pointers for traders issued by the supervising authority has resulted in substantial blind spots on investor schooling and safety.

“Unclear and/or too strict regulation might convey adverse impacts on the expansion of the blockchain trade by driving Korean firms utilizing blockchain know-how or conducting blockchain-based recreation companies out of Korea,” says Park.

He says that the federal government must handle and management the dangers posed by the digital asset ecosystem by laws, however at the identical time wants to determine a system to advertise progressive results primarily based on recognition that the digital property and their associated companies might presumably develop into a serious trade.

“Considering the fast progress and alter of the market, the minimal regulatory framework ought to be introduced as quickly as potential to be efficient and legitimate,” he provides.

Through the brand new regulation to return into play, Lee, of Lee & Ko, sees the regulatory framework of digital property will probably be a lot clearer, which can give extra readability to the businesses planning to enter or increase their operation into South Korea’s digital asset market.

“There will definitely be extra regulation than earlier than on digital property, which can change the present panorama of the market, and it’ll have an effect on such firms as effectively,” says Lee.

While particulars of the laws, akin to subordinate guidelines of the brand new legislation, are being ready, companies involving digital property that could be categorized as securities, or of property that will probably be topic to extra stringent regulation, will seemingly not be began, says Lee, “and such a interval might not be that brief”.

Lee notes that since many extra digital property could be categorized as securities, earlier enterprise fashions might should be adjusted. In addition, the legislation by nature might not outline or stipulate each element and a few interpretation will nonetheless be required, which can trigger some regulatory uncertainty and danger.

Additionally, the South Korean authorities has labored on boosting blockchain innovation, akin to organising a regulatory sandbox for progressive blockchain companies and the Bank of Korea’s pilot exams to introduce the central financial institution digital currencies whereas at the identical time deterring or banning speculative or legal 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 authorities is engaged on setting a clearer regulatory framework for digital property,” says Lee. “These steps are in good order, in step with the worldwide regulatory course. We will see how the regulatory framework for blockchain know-how will probably be formed in larger element within the close to future.”