On February 6, 2023, the Financial Services Commission (the “FSC”) announced its plan to overhaul the regulatory framework around the issuance and distribution of security tokens (hereby referred to as the “Plan”).

The Plan defines a “security token” as a new form of digitized security based on distributed ledger technology, and announces that security tokens must be issued or otherwise distributed in accordance with the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”) and its related laws and regulations.

With the regulatory goal of fostering innovation and protecting investors, the Plan includes guidelines for identifying security tokens and proposed amendments to the relevant laws.

For the identification of digital assets that may qualify as investment contract securities under the Capital Markets Act, the FSC highlights that (i) efforts made by a third party (i.e., issuer of a digital asset) must be indispensably significant to determine the success or failure of the relevant business and (ii) there must be a promise to distribute profits from the performance of the relevant business.  The FSC also presents the following examples to better illustrate how digital assets may be classified as security tokens.

Digital assets are highly likely to be considered security tokens if:
 

• The investor has any equity interest in the operation of the business, any dividend right based on the performance of the business, or a right to claim distribution of residual assets.

• The issuer distributes any profit generated from the business to the investor.

• Such a payment made to the investor has an actual effect of distributing profits, even if it appears to be a consideration for the investor’s investing activities.
   

On the other hand, digital assets are highly unlikely to be deemed as security tokens if:
 

• There is no issuer or no person that must comply with the obligations that correspond to any investor right.

• There is no right indicated on the digital asset, including the right to profit.

• The digital asset in question is issued and used for the purpose of consumption/use of current or future goods/services.

• The digital asset is issued for the purpose of maintaining stable value to be used as a means of payment or exchange without any promise for redemption.

• The investor participates in the management/operation of the business on a daily basis and hence, there is no information asymmetry on the business.
   

In consideration of the innovative nature of the digital asset industry, the FSC proposed the points listed below in the Plan to amend the Capital Markets Act and the Act on Electronic Registration of Stocks and Bonds (the “Electronic Securities Act”).  Primarily, the FSC plans to:
 

• Treat security tokens as electronic securities under the Electronic Securities Act, acknowledging distributed ledger technology as a means of recording information on securities in a public register.

• Amend the Enforcement Decree of the Electronic Securities Act to establish “issuer account management institutions,” through which any qualified person can register and issue security tokens on his or her own without having to use securities firms.

• Raise the existing threshold for small public offerings and introduce a new type of small public offering.

• Establish a license requirement for over-the-counter brokerage of security tokens and a listed-securities market for investment contract securities.
   

The Plan is the first regulatory guidance on security tokens in Korea.  Going forward, we expect to encounter some cases of delisting of digital assets from cryptocurrency exchanges and stricter scrutiny over the issuance of new tokens.  As the Plan is implemented, we also expect to see new types of investments and new market players (e.g., securities firms and over-the-counter brokers) based on security tokens.  All such anticipated market movements call for a detailed legal review and analysis of any intended activities involving digital assets to ensure full compliance with the relevant laws.

[Korean Version]