[Executive Summary]

• The financial authorities of South Korea – the Korea Financial Intelligence Unit (“KoFIU”) and the Financial Services Commission (“FSC”) – plan to create two categories for virtual assets (“VAs”), which are security-based and non-security based. The former is likely to be subject to the existing capital market laws, and the latter is likely to be regulated by a new set of laws.

On May 24th, in the emergency meeting held at the National Assembly regarding the Enactment of the Digital Asset Framework Act and measures to protect VA investors, KoFIU reported that approximately 280,000 users own about 80.9 billion LUNA, as of midnight of May 19th. As of May 6th, 100,000 users owned about 3.17 million LUNA, showing that the number of people invested in LUNA and the quantity of the LUNA owned by them dramatically increased during the LUNA crisis.

In the meeting, the financial authorities pointed out insufficient procedures for issuing and listing VAs and how they are causing risks: “there are no regulations. The so-called ‘whitepaper’ or other public disclosure of important information is either insufficient or difficult to understand. The requirements for listing and delisting VAs are too lax.”

Accordingly, the financial authorities are considering categorizing VAs based on security-based and non-security-based. The former, which is temporarily named Security-type Tokens (“STO”), would be VAs based on real assets, such as artworks, real estates, trade receivables, stocks, and so on. The FSC plans to “establish a market and regulatory framework which allows issuing STOs based on the capital market regulations with sufficient investor protection measures….”

As to the non-STOs, FSC would create a different regulatory framework by utilizing related bills pending in the National Assembly, which includes but is not limited to the issuance, listing, delisting, and preventing unfair trading. FSC is likely to prepare more detailed investor protection measures for non-STOs, such as insurance plans for hacking and system failures, confiscating profits from unfair trading, etc. In short, STOs would be subject to the existing capital market laws of Korea; and non-STOs would be subject to the up-and-coming, so-called Digital Asset Framework Act.

The financial authorities are highly likely to refer to international cases in regulating VAs. In the meeting, the FSC stated: “securing the consistency with international regulations and fortifying the international cooperation is necessary because of the decentralized, anonymous, and trans-bordering nature of VAs. We will achieve such by thoroughly analyzing foreign trends in VA regulations, such as the US executive orders and discussions involving international financial institutions.”

Following the development of the VA categorization framework, companies may have greater access to VA information. However, if some VAs are categorized as security-based, capital market laws will be applied. This would levy a greater burden on companies in trading, considering that the travel rule has already been linked. Companies that may be affected by this development are recommended to closely follow the progress as they may need to take more information into consideration when trading.