[Executive Summary]

• Cha & Kwon Law Offices has obtained the draft of a legislative proposal regarding the regulation of virtual assets before its official release. Tentatively titled “the Legislation for Restoring Fairness in the Digital Asset Market and Ensuring Reliable Transaction Environments”, the ruling party in Korea, has put forth a legislative proposal that mainly targets unfair trading of digital assets. The proposal also includes NFTs in its category of digital assets, which means that if enacted, the legislation would regulate a sector that was previously not subject to government involvement. Also, in the supplementary provision, the proposal required the FIU to submit assessments, including legislative opinions, on the subject of commercial banks issuing real-name accounts to VASPs in a fair and rational way.

Cha & Kwon Law Offices has obtained the undisclosed draft of a legislative proposal regarding the regulation of virtual assets before its release (the draft was officially released on October 31st). The People’s Power Party, the ruling party in Korea, has put forth a legislative proposal regarding the regulation of virtual assets. Tentatively titled the “Legislation for Restoring Fairness in the Digital Asset Market and Ensuring Reliable Transaction Environments”, its contents are as follows.

The legislation seeks to preemptively secure a layer of protection for digital asset users by achieving the following objectives: protecting user deposits from possible bankruptcy, preventing unfair trading, and requiring digital asset companies to monitor and report on market movements.

In order to achieve the above objectives, the legislation sets out to regulate certain sectors and activities.

1. The obligation to acquire insurance policies and allocate funds to prepare for possible hacking or server malfunctions
2. Prohibition of insider trading, price manipulation, unfair practices, trading self-created digital assets
3. Obligation to monitor transactions and report any abnormal activity
4. Providing the Financial Services Commission (the “FSC”) with the authority to review and audit digital asset service providers, as well as the regulatory capability to suspend operations and order restitution

The legislation mainly targets unfair trading of digital assets, seeking to punish the usage of undisclosed or privileged information for trading, fraudulent trading, price manipulation, false representation. The legislation also imposes an obligation on digital asset companies to report instances of such unfair trading.

According to the legislation the FSC will be given the authority to have digital asset companies submit reports on the management of users’ assets, information on whether the companies are upholding the obligations, as well as information on their business methods.

Notably, the legislation also includes NFTs in its category of digital assets, which would constitute a blanket regulation covering a sector that was previously not subject to such government involvement.

Also, in the supplementary provision, the proposal required the Korean Financial Intelligence Unit (the “FIU”) under the FSC to undergo inspections of the standards and processes of commercial banks and submit assessments, including legislative opinion, on fair and rational ways for commercial banks to issue real-name accounts to VASPs. The proposal required the FIU to submit such an assessment before the next National Assembly Standing Committee Reporting in 2023.

It is still unclear whether the legislation's provisions and the content will hold up during negotiations as it is still only a proposal and has not yet been formally discussed in the National Assembly of Korea. For commercial banks, a clear, unambiguous standard regarding the issuance of real-name accounts to VASPs may be anticipated in the foreseeable future, which would also bring significant changes to the NFT industry. This legislative proposal will need ongoing monitoring and updates due to its broad implications.