[Executive Summary]

• It was confirmed that Shinhan Bank withdrew from the Klaytn Governance Council as a result of the government's ban on holding virtual assets by financial institutions in 2017. Responding to the continuing criticism for years of the government’s emergency measures that lack legal basis, the chairman of the Virtual Asset Special Committee from the ruling party stated that the Framework Act on Digital Assets will include measures to lift the ban.

On June 30th, Klaytn officially announced that Shinhan bank has withdrawn from the Klaytn Governance Council (“GC”) after a year since it joined the Kakao Klaytn Network as a governance member. Klaytn GC is a group of node operators (validators) in charge of verifying and generating blockchain blocks to ensure there are no issues such as double payment within the network. In return, the GC members receive Klay as a reward which gives a proportional number of votes for them to cast on governance decisions regarding matters of the Klaytn ecosystem.

It can be reasonably inferred that Shinhan Bank's withdrawal from the GC was partly due to the government's decision in 2017 to ban financial companies from holding virtual assets. In December 2017, the then-government held a Vice Minister Meeting and announced emergency measures to ban financial institutions from holding, purchasing, acquiring collateral, and investing in equity in virtual assets.

As the public’s interest in virtual assets was rapidly growing at the time, the then-government hoped to curb speculative demand and prevent market overheating. However, this led to a conflicting situation for Shinhan Bank; it was not allowed to hold any type of virtual assets including Klay which they were meant to receive as a reward for working as a governance member. The bank said, “It is illegal to create a wallet without a virtual asset license, and as a result, it is impossible to operate a node and receive virtual assets as a reward.” It continued, “Klaytn also suggested giving our company a one-year grace period. However, even after a year of working with the authorities, the regulation has not been relaxed, leaving us with no choice but to leave the GC.”

Some industry insiders criticize that the emergency measures, which the government enforced without a legal basis, have been obstructing the revitalization of the domestic blockchain industry for several years. Kim Hyung-Joong, the president of the Korea Fintech Society and a collaboration professor at the Korea University School of Cybersecurity, commented, “Currently, the regulations that were improvised under the emergency measures are being applied as if they are laws or enforcement ordinances. These, however, do not have a legal justification and are working against the traditional financial institutions’ will to enter the blockchain business.”

Responding to such criticisms, the ruling party and the government seem to have included measures to lift the ban on holding virtual assets under the Framework Act on Digital Assets. Aides to Yoon Chang-Hyeon, a member of Parliament from the ruling party and the chairman of the Virtual Asset Special Committee, confirmed that the discussions to legislate the act, including the measures to lift the ban, are currently underway between the party and the government.

Thus far, the Korean government has unilaterally made regulations, most of which are temporary measures, on the virtual asset industry. Once the Framework Act on Digital Assets is implemented, it can be expected that there are fewer uncertainties and fluctuations affecting the market. This can, consequently, revitalize and eventually stimulate the growth of the Korean virtual asset market.