The digital asset market was recently hit by the Terra (LUNA) crash and the Celsius withdrawal freeze. It was further shaken by the global economic downturn and austerity measures. With 5.58 million cryptocurrency investors and 1,256 listed cryptocurrencies, and average daily cryptocurrency transactions amounting to KRW 11 trillion, Korea’s KRW 55 trillion digital asset market was hardly unaffected by this crisis. Consequently, the need to enact laws on digital assets has become ever more crucial.
Regulatory Framework – Now
Effective since March 25, 2021, the amended Act on the Reporting and Use of Specific Financial Transaction Information imposed reporting and anti-money laundering obligations on digital asset businesses. However, its regulatory effects are confined to the prevention of money laundering and terrorist financing. Effective from January 1, 2023, income derived from the transfer or lease of digital assets will be classified as ‘other sources of income’ and will be taxable at the rate of 20% after applying a basic deduction of KRW 2.5 million to the income pursuant to the Income Tax Act.
Regulatory Framework – Future
On June 16, 2022, the Yoon administration released a roadmap of their economic policy and announced their plan to enact the Framework Act on Digital Assets, the very first comprehensive law on digital assets, to take effect from 2024. With the objective of enhancing consumer protection and trade stability, the current administration will establish a committee to prepare guidelines on digital assets and devise a dual regulatory scheme to regulate digital assets as both securities and non-securities depending on the economic substance of the digital assets. These guidelines are intended to provide guidance on the listing mechanics including eligibility, monitoring of unfair trade, and investor protection. Under the dual scheme, securities-type coins will be regulated under the Financial Investment Services and Capital Markets Act, while non-securities-type coins will be regulated under the Framework Act on Digital Assets.
Currently, seven bills relating to the digital asset business await enactment, and six bills have been proposed in the National Assembly to amend the Electronic Financial Transactions Act and the Act on Reporting and Use of Specific Financial Transaction Information. At the request of the Financial Services Commission (“FSC”), studies were recently conducted by capital markets specialists to analyze the efficacy of these bills and legislation in creating a legal framework for the digital asset industry.
Discussions on Regulatory Framework
Discussions among politicians, financial authorities, and digital asset exchanges on the regulation of digital assets are in full swing. On June 13, 2022, a second party conference was held in the National Assembly to “restore fairness in the digital asset market and protect investors”. With the aims of preventing the recurrence of the Terra incident, five domestic digital asset exchanges signed an MOU to launch a joint consultative body and announced that they will collaborate to create and implement self-improvement measures. The FSC, the Financial Intelligence Unit, and the Financial Supervisory Service (“FSS”) also attended the conference.
The key points of the joint self-improvement measures are:
(1) To strengthen the protection of investors from beginning to end – i.e., from listing to delisting of digital assets on the exchanges – by unifying the evaluation forms and screening guidelines; assessing the feasibility of digital asset projects rather than evaluating the technical efficiency of digital assets; and conducting regular assessments on digital assets;
(2) To establish a contingency plan and create a hotline for round-the-clock support;
(3) To introduce an alert system to strengthen the monitoring of digital asset trading; and
(4) To provide a whitepaper and evaluation results to investors and require training on digital asset investment.
A representative from the FSC stated that “the government will examine the efforts of digital asset exchanges and strive for innovation by incorporating the necessary regulatory elements in the Framework Act on Digital Assets.” An FSS representative also stated that the FSS is conducting on-site inspections of financial institutions to prevent the spread of risks of another Terra incident to the rest of the financial system; he noted that given the complexity of the digital asset market and the difficulty of predicting outcomes, a self-regulated market built through active participation of private experts is crucial.
The joint self-improvement plan will likely be implemented before the Framework Act on Digital Assets comes into force. The success of the plan will be largely dependent on the intersectional workings of the human and capital resources of the exchanges; the roles played and the support provided by the financial authorities; and the interests of the investors.
The Terra incident was a rude awakening to domestic digital asset market participants. Hence, the need for legislation on digital assets has become ever more urgent, although it will also be essential to benchmark the regulatory directions of other leading countries and take them into legislative consideration.