(Interview) 'Korea lags behind in legalizing the cryptocurrency industry'

IP lawyers stress need to fill regulatory gap for clarity

Anna J. by the park

While Korea's first law on cryptocurrencies, the Act on the Protection of Virtual Asset Users, is set for implementation this July, the country still lags behind global powers in providing a legal framework for the advancement of the virtual asset industry, intellectual property (IP) lawyers said. Is behind. Says a major law firm.

During an interview with The Korea Times, IP lawyers from Yulchon – a leading law firm in Korea – said Korea needs to start by rapidly amending the existing domestic financial transactions law to become one of the more advanced countries in enforcing regulations on virtual asset service providers. Was considered one of the. as well as passing the first crypto bill focused on investor protection in Parliament last summer.

Nevertheless, the Korean government fell short in filling the regulatory gap faced by many crypto business operators on key matters, such as the types of cryptocurrency businesses allowed in the country and rules on the issuance of virtual assets and disclosure requirements of such assets, Which are necessary for further progress. The development of the virtual asset industry.

“While regulations regarding virtual asset issuance and stablecoins are becoming clearer and more standardized in the United States and Europe, Korea’s legal frameworks still lack clear regulatory guidance related to a number of important issues in the cryptocurrency industry, including “It also includes regulations on initial coin offerings (ICOs) and disclosure requirements,” Lim Hyeong-joo, head of the law firm's New Industry IP team, explained during an interview at Yulchon's headquarters in southern Seoul.

Lim Hyeong-ju, head of Yulchon's new industry IP team, speaks during an interview with The Korea Times at the law firm's headquarters in southern Seoul on March 6. Courtesy of Yulchon

The partner lawyer specializing in cryptocurrency and blockchain technologies highlighted that one of the most distorted parts of the domestic virtual asset market is Korea's complete ban on ICOs. The ban on ICOs dates back to September 2017, when financial authorities introduced a prohibitive policy. Since then, domestic coin issuers have been conducting ICOs in foreign countries such as Singapore to avoid domestic restrictions.

“The current priority of financial authorities lies in the protection of investors. However, insufficient regulation on cryptocurrency business operators is hindering the active development of virtual asset markets in Korea,” Lim said, stressing the need for timely additional legislation on the virtual asset industry. Said while giving. behaviour. “Rather than imposing a blanket ban, it would be more desirable to establish clear criteria for ICOs.”

In fact, various sectors are urging the government to lift the ban on domestic ICOs to boost innovation in the financial and tech industries in the country. In response to such voices, the Yoon Suk Yeol administration promised to include the allowance of ICOs as one of the key policy objectives in the cryptocurrency sector at the beginning of its term in 2022.

Following the passage of the country's first crypto bill focused on investor protection in the National Assembly last year, which will take effect this summer, both financial authorities and parliament have vowed to immediately develop a second phase of crypto legislation, Whose goal is to fill the regulator. Gaps on important aspects such as disclosure systems of virtual assets, rules on ICOs, stable coins and virtual asset operators.

However, completing the parliamentary procedures for the second phase of legislation is now anticipated to take longer than initially expected, as many aspects of the proposed legislation remain undecided and subject to ongoing discussions.”

“Given the recent substantial growth in virtual assets and the approval of a Bitcoin ETF in the US, it seems inevitable that new legislation reflecting these developments will be proposed, which will join a number of other bills already pending in Parliament. As a result , Passing the second-phase law by the second half of this year could prove quite challenging,” Lee Han-kyol, a partner at the law firm, said during the interview.

Yulchon's patent lawyer Lee Han-kyol speaks during an interview with The Korea Times at the law firm's headquarters in southern Seoul on March 6. Courtesy of Yulchon

Lee, who is also a patent attorney, said that in the US, there are several main issues related to cryptocurrency regulations – whether virtual assets should be classified as securities or commodities, whether non-fungible tokens (NFTs) or stable coins should be classified as crypto. Who should fall under the regulations, and which federal regulator, the Securities and Exchange Commission or the Commodity Futures Trading Commission, should have primary supervisory control over the sector – has been deeply debated in both the US House of Representatives and the courts, with a number of issues raised. Has been made clear. Process.

Similarly, the EU has introduced proactive legislation regarding virtual asset regulations through “The Markets in Crypto Assets”, a landmark legal framework for the cryptocurrency sector set to come into force later this year. The law outlines regulatory requirements not only for investor protection but also for coin issuance and stablecoins.

“In that regard, across countries – including the US and countries in Europe – regulations relating to some of the most controversial issues in the virtual assets and cryptocurrency markets have been somewhat actively clarified, although the degree of such intensity may vary. “There may be regulations between each country. However, in Korea, there still appears to be a lack of regulatory clarity on several key issues within the cryptocurrency sector,” the patent attorney said.

Son Do-il, head of Yulchon's IP and technology practice group, speaks during an interview with The Korea Times at the law firm's headquarters in southern Seoul on March 6. Courtesy of Yulchon

Son Do-il, head of Yulchon's IP & Technology practice group and a former judge, said Korea's unique legal characteristics also present realistic challenges in surpassing other countries in cryptocurrency legislation.

He said that Korean financial authorities' conservative and passive approach to cryptocurrency law can be attributed to many of the systemic differences in criminal prosecution between the US and Korea.

“When someone decides to commit an act of fraud in the cryptocurrency sector it can be viewed from the perspective of his or her expected gains and losses. In the US, the expected resulting price to pay for the act of fraud, in terms of length of prison term, It is very serious,” said the son. “It is also easier for authorities to seize all assets related to criminal acts. In contrast, Korea's penal system is not only more lenient towards criminals than the US, but also requires much stricter proof of arrest to confiscate the proceeds of crime. is also required.”

“It is not easy to trace and prove that assets are directly related to criminal acts.”

“Thus, I think these differences in legal systems may also contribute to the US having a greater ability to open up cryptocurrency markets compared to Korea,” he said.

NFTs not included in Phase 1 crypto law

Meanwhile, NFTs, central bank digital currencies and various types of electronic tokens have been kept out of the scope of the Act on Protection of Virtual Assets Users, the first phase of the Cryptocurrency Act scheduled to come into effect in July this year. IP lawyers anticipate that Korean financial authorities will issue guidelines on NFTs to provide further regulatory clarity on these virtual assets.

“Currently, financial authorities appear to separate NFTs of a collectible and art nature from other types of virtual assets. This stance is anticipated to be reflected through Security Token Offering (STO) guidelines issued by the Financial Services Commission in early 2023. It is expected the top financial regulator will further clarify its norms for this virtual asset class by issuing new guidelines, Lim said.

Lee said collectible or art NFTs, which are primarily for collection purposes, may be treated differently than traditional virtual assets, but some could be considered similar to fractional investments like STOs. In contrast, NFTs issued in a similar manner to traditional cryptocurrency assets may fall under crypto regulations.

“With respect to NFTs that are issued in a similar manner to cryptocurrencies and have similar functions, despite being labeled as NFTs, they essentially utilize and leverage blockchain technologies. As a result, it is expected that “It is expected that future NFT guidelines will include these NFTs as cryptocurrency assets,” Lee said.

Cryptocurrency market will start new business

Son stressed that the potential benefits of growing virtual asset markets for the economy should be considered broadly, such as their potential to expand the market by fostering innovation.

“An economy that depends entirely on the support of large conglomerates can never truly grow. Ultimately, it is essential for small businesses to achieve strong growth so that the economy can cross the $50,000 per capita income threshold. “While traditional investment markets often face challenges in directing the necessary capital to these smaller companies, it is important not to overlook the potential positive impact this aspect of the cryptocurrency markets can have,” Son said. Highlighting that financial authorities may need to legislate on virtual asset markets with the goal of creating innovative ways to finance virtual assets. and promising ideas of venture companies.

The law is still in the process of being formed in the courts

When asked about the unique characteristics of legal cases related to cryptocurrencies, lawyers noted that one of the most distinctive characteristics is that legal debates and court decisions on key issues of virtual asset markets are often regulated by the government that officially rules for them. And the regulations take place before they are prepared.

“Generally, the courts' application and interpretations of certain rules or laws come after such law has been put into practice. However, cases involving cryptocurrencies differ in that the courts present their interpretations well in advance of what they “Laws and regulations are often taken into account during the construction process,” Lee said.

Noting that crypto regulations are still in the process of being formulated in different countries, Lim underlined the importance of engaging in global discussions, as digital assets by nature transcend geographical boundaries.

“Since virtual assets inherently operate on a global scale without borders, it seemed necessary to collaboratively establish a unified global protocol rather than falling victim to any one country's Galápagos Syndrome – a term used to describe a globally available virtual asset. Reflects separate development of product – This would be “It is beneficial for nations to openly discuss laws and regulations regarding virtual assets,” Lim said.