Direction of Virtual Asset Regulatory System in Korea (November 2022)

Earlier this month in November, the Financial Services Commission (FSC) announced legislation on the direction of a virtual asset regulatory system establishment.

• Digital Asset Market Trends from 2017 to 2021
  
  The Korean government has consistently prohibited all types of ICOs as a part of its response to pending issues in the digital asset market. In particular, the government has mandated VASPs to register with the authorities and imposed anti-money laundering obligations in accordance with the Act on Reporting and Using Specified Financial Transaction Information which was amended in September 2021.

• Announcement of the New Administration’s Direction for Establishing Digital Asset Infrastructure and Regulatory System
  
  The new administration has announced that it will make active efforts to institutionalize blockchain infrastructure and relevant regulations to balance innovation through new technologies such as blockchains with consumer protection and financial stability. In particular, the government enacted the “Digital Asset Basic Act,” in accordance with Article 35 of the national policy tasks, to create an environment in which the digital asset market can grow responsibly based on investors’ trust. This can be considered that the government prepared minimum regulations to support “responsible innovation” in the virtual asset market, taking international trends into account.

1. Article 35 of the National Policy Tasks: Establish Digital Asset Infrastructure and Regulatory System
   
   1. June 2022, completed commissioned research comparing and analyzing related bills pending in the National Assembly with the overseas legislative trends
      
      
   2. June 2022, visited the U.S. Treasury Department, Ministry of Justice, Fed, IMF, etc. to discuss global regulatory cooperation
      
      
   3. Continue working-level consultations on the direction of discussions related to digital assets through meetings with related ministries, private experts, and industry participants.
      
      
2.  Digital Asset Public-Private Joint Task Force Officially Launched

   The government officially launched a digital asset public-private joint task force to share the results of discussions and efforts thus far and to establish a pan-government institutionalization plan.

• Principles and Plans for the Proceed with Virtual Asset Regulations

1. Proceeding Principles
   
   1. Gradual, Phased Proceedings
      The gradual and phased proceedings announced by the FSC focus on necessary matters and enhance the resilience to supplement and improve according to changes in the situation.
      
      
   2. Principle to Apply the Same Regulations for the Same Functions and Risks
      Regulate in accordance with the functions and level of risks
      
      
   3. Consistency with the Global Regulatory Trend
      Establishing a global cooperation system and consistency with the global regulatory trends by taking into account the international discussions on the matter by major countries such as the U.S. and the EU, as well as international organizations
      
      
2. Proceeding Plan
   
   1. Legislation of essential matters for investor protection, such as the definition of virtual assets, protection of investor funds, and prevention of unfair trade
      
      
   2. Once the international standard is established, market order regulations will be added accordingly
      
      
   3. Once the market is stabilized, additional measures such as the establishment of a dedicated organization for virtual assets, etc. will be reviewed

• Draft of the Act on Regulation of Unfair Trade in Virtual Assets

1. Definition of Virtual Assets, etc.: the definitions of virtual assets and virtual asset service provider (VASP) will follow those set under the Act on Reporting and Using Specified Financial Transaction Information
   
   
2. User Asset Protection:
   
   1. (Users’ deposits) Entrusted separately from proprietary assets
      
      
   2. (Users’ virtual assets) Creating a list and holding the same quantity of the same item
      
      
   3. (Damage compensation) Regulations regarding compensation for damages including the purchase of insurance, etc. in preparation for compensation for accidents such as hacking and data processing failure
      
      
3. Regulation on Unfair Trade
   
   1. (Prohibition of unfair trade) Similarly to the Financial Investment Services and Capital Markets Act, the use of undisclosed important information, market manipulation, and unfair transactions are prohibited, and trading of self-issued virtual assets with a high risk of unfair trade is restricted.
      
      
   2. (Market surveillance) Imposition of obligation to VASPs to monitor and report abnormal transactions
      
      
   3. (Recovery of unjust profits) Thorough recovery of unjust profits from unfair transactions
      
      
4. Supervision and Sanctions
   

1. Supervises and inspects VASPs, and in case of violation of laws, etc., give correction orders or report to investigative agencies
   
   
2. (Criminal penalty, fine) Imposition of criminal penalty and fine for violation of the law