[Executive Summary]

• The financial authorities announced that the guideline for the security token offering (STO) will be established within this year. In case of the token is categorized as security in accordance with the guideline, the token will be delisted from the current virtual asset market and transferred to the KRX digital exchange market. As a result, there is a growing concern among most virtual asset exchanges since a large amount of their income comes from brokerage fees.

On September 6th, a seminar was hosted by the Financial Services Commission (“FSC”). The topic of the seminar was “The need to organize the issuance and distribution system of security tokens.” At the seminar, the vice president of the FSC, So-Young Kim, announced that the guideline for the security tokens will be established this year. It is expected that the guideline will cover systems required for the issuance, distribution, and circulation of the security tokens.

Also, it is expected for the investors and businesses to determine whether the token is a security or not in accordance with the guideline. With the announcement by the FSC, many expect that there will soon be a consistent and official guideline for determining which tokens are considered as securities.

However, according to Kap-Rae Kim, a senior researcher at the Korea Capital Market Institute, the guideline should not be interpreted as a definitive checklist or a guideline completely determining which ones are security tokens. The establishment of the guideline can be regarded as a substantiative standard to generally differentiate between securities and tokens. Investors and business operators can still make inquiries to the FSC regarding the possibility of a token being categorized as security even after the guideline is announced.

Furthermore, virtual asset exchanges will be obligated to examine future tokens whether they will be considered securities in accordance with the guideline before they are listed. The exchanges can refer to the legal advisory reports and standards with the guideline in determining which tokens shall be considered securities.

The related authorities seem to be making progress on the establishment of the KRX “Digital Security Market” for the security tokens. The Digital Security Market will handle the tasks of examination of the listing, brokerage of the transaction, sales confirmation, and overwatching the market.

Upon the adoption of the guideline, there is a high possibility for the existing tokens on the virtual asset markets to be delisted and transferred to the KRX Digital Security Market. Many assume that the so-called “Altcoin,” referring to most of the tokens other than Bitcoin or Ethereum, may be categorized as security tokens and consequently be transferred to the Digital Security Market in accordance with the guideline. As a result, there is a growing concern among virtual asset exchanges since brokerage fees are one of the main sources of their income.

The government’s establishment process for the system and legal framework for virtual assets has been accelerated. While such an establishment would bring more stability and certainty to the market, it is recommended for the market participants to prepare a contingency plan in case major tokens are classified as securities.