Cha & Kwon Law Offices analyzed the functions and token economy of a utility and governance token used in an overseas decentralized trading protocol, and prepared a legal opinion letter addressing whether the token would be classified as a security under the Financial Investment Services and Capital Markets Act.

The token was used within an automated market maker-based trading protocol for purposes such as liquidity supply incentives for ecosystem participants and governance voting. The protocol also included a token buyback and burn mechanism using a portion of protocol fees. Accordingly, the key issue was whether these functions and reward structure could be interpreted as granting token holders a right to receive profits based on the performance of the underlying business.

Cha & Kwon Law Offices conducted a detailed review of the token’s staking and reward functions, liquidity supply incentives, governance rights, and buyback and burn mechanism, based on the conceptual elements of financial investment products under the Financial Investment Services and Capital Markets Act and the regulatory authorities’ criteria for determining investment contract securities.

As a result, Cha & Kwon Law Offices advised that the token was unlikely to be classified as a security under the Financial Investment Services and Capital Markets Act. This conclusion was based on factors such as the token’s primary function being the use of the protocol and participation in the ecosystem, the absence of any contractual claim to business profits arising solely from holding the token, and the characterization of the buyback and burn mechanism as a supply management structure.

Cha & Kwon Law Offices provides legal opinion letters on the securities classification of virtual assets involving diverse functions and token economy structures by assessing the specific rights attached to the token and its economic substance.