On September 25, 2021, a requirement for virtual asset service providers (“VASPs”) to submit report came into force pursuant to the “Act on Reporting and Using Specified Financial Transaction Information” (the “Financial Transaction Information Act”). Since then, 42 VASPs have submitted their reports to the Korea Financial Intelligence Unit (the “KoFIU”), and the KoFIU, based on their full discretion, have “accepted” 29 of such reports. With the introduction of a new reporting requirement under the Financial Transaction Information Act, the Korean virtual asset industry is rapidly evolving.
However, limitations of the Financial Transaction Information Act, which is mainly designed to prevent money laundering and financing of terrorism in financial transactions, to serve as the regulation governing overall aspects of virtual asset business and industry have been pointed out continuously. As a result, a number of legislative bills with the goal of regulating virtual asset businesses and the industry are currently pending at the National Assembly.
The bills pending at the National Assembly can be largely classified into the following two categories: (i) those calling for the legislation of new laws to regulate overall aspects of virtual asset businesses; and (ii) those calling for the amendment of the Electronic Financial Transaction Act to include laws specific to virtual asset businesses. We will briefly explain the key issues discussed in these bills below.
Definition of Virtual Assets
Most of these bills define “virtual assets” in a broad sense, similar to the definition provided in the Financial Transaction Information Act (i.e., electronic certificates that have economic value and that can be traded or transferred electronically). On the other hand, some of the bills define “virtual assets” in a relatively narrow sense by focusing on block chain technology as a conceptual element. Regardless of the definition of virtual assets, the establishment of a separate set of regulations for each type of virtual assets (e.g., utility tokens, security tokens, etc.) is currently being discussed as an option.
Issuance of Virtual Assets
While some bills require the issuers of virtual asset to obtain a license for such issuance (i.e., initial coin offering or ICO), others do not categorize virtual asset issuers as VASPs but stipulate that their businesses must be reviewed by the Financial Services Commission (the “FSC”), or that they must register the issuance of virtual assets with the FSC.
Protection of Deposited Assets
A proposal has been made to introduce a legal system to safeguard customers’ assets deposited with VASPs against their insolvency. Most of the bills require all VASPs to maintain customers’ virtual assets in escrow, but some bills only place this obligation on virtual asset traders. A large number of bills require a certain percentage of customers’ deposited assets to be maintained in a “cold wallet” that is disconnected from the Internet. To reduce the financial burden on VASPs in their early phase, some bills allow them to contractually provide damage compensation undertaking to customers, in lieu of having to physically keep customers’ assets in escrow.
Provision of Information to Users
Most bills require VASPs to inform customers of the names and other details of the virtual assets being traded/exchanged as well as the risks associated with such transactions. A substantial number of bills also obligate VASPs to provide customers with certain material information on such virtual assets through white papers or business reports. Such information material for investors’ investment decision would include, among others, those relating to issuer of virtual assets, any virtual assets held by the issuer’s related parties, any commissions or fees being paid, and financial and/or managerial conditions.
Restriction on Unfair Transactions
These bills also discuss unfair transactions defined in the Financial Investment Services and Capital Markets Act, such as the use of material non-public information, market price manipulation, unfair trading, and market disturbances. In particular, most bills prohibit market price manipulation, and a substantial number of bills ban the use of material non-public information.
These bills also address various issues, including VASPs’ duties (e.g., the principle of good faith), prohibited acts (e.g., prohibition of name lending), liability for damages caused by electronic processing errors, and matters concerning supervision, inspection, and investigation.
Once better established laws and regulations on virtual asset business are introduced to the market, business operators engaging in virtual asset services in Korea are expected to undergo significant changes to comply with the new regulatory framework. The pending provisions stipulated in these bills at the National Assembly foreshadow how the regulatory regime regarding virtual asset business will be established.