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New Guidance Tells South Korea’s Crypto Firms to Self-Regulate

South Korea’s Crypto Firms

The new guidelines require firms to determine whether or not a token is a security. South Korea’s crypto firms, token issuers, and security brokers now have a bit more clarity on what defines a security token under a new guidance published Monday – but will leave it up to the industry to report correctly.

The guidance, written by South Korea’s Financial Services Commission defines ‘security tokens’ as tokens that are digitised using distributed ledger technology, following the same definition as other jurisdictions in the Asia region.

As it follows, the country’s Financial Services Commission has placed responsibility on firms to regulate themselves, and rightly declare the asset class that is traded.

“South Korea’s approach of tying the scope of security token offerings back to the definition of securities is broadly aligned with other regulators such as Singapore and Hong Kong,” said Angela Ang, senior policy adviser at blockchain intelligence firm TRM Labs and a former regulator at the Monetary Authority of Singapore.

Ang adds that this step in regulatory clarity should encourage further development and innovation of digital assets in South Korea’s capital markets.

South Korea’s TradFi sector is already responding to the news  – with players who hold securities licences taking swift action. 

One firm, Shinhan Investment and Securities, amongst the country’s largest securities companies, has openly invited other companies to join an alliance for the adoption of token securities and to set standards and best practices for the issue and trade of the asset.

Prior to the new guidance, traditional securities firms were anxious to tread the security tokens market.

Mooni Kim, foreign attorney at law firm Kim & Chang, says that the general stance held is that South Korea may have their securities tokens laws similar to that of the US. However, many questions remain, begging for more clarity on said similar aspects.

One of South Korea’s crypto firms’ exchange executives commented – on condition of anonymity to preserve his relationship with local regulators – that he does not see the newly implemented guidance as a sign that regulators are looking to help grow the crypto industry.

“Securities are already available on the securities market,” he said, pointing out that South Korean crypto exchange business wouldn’t change much. “Perhaps accurately defining the asset types should come first.”

While South Korea is making strides in trusting firms that they will report, in the case of securities, their traded asset classes correctly, the anonymous executive says that the country shouldn’t rush to be ahead of the game in crypto regulation, and instead should keep watch out for the news.

Overall, the guidance is “good for investors,” according to the executive. In the implementation of the guidance, the “Korea Securities Depository will control the total amount of issued assets and keep an eye on token issuers.” 

This move can help prevent events like gaming giant Wemade’s false disclosure of Wemix tokens, which happened last year. As Wemade falsely reported the amount of tokens it issued, many major crypto exchanges decided to delist Wemix, stock prices for the company plummeted. 

This guidance can potentially help rebuild South Korea’s crypto firms’ reputation and credibility amongst the general public, after the collapse of Terra’s UST stablecoin. Since then, South Korean regulators have been drafting and proposing tougher customer protections laws, and a regulatory framework designed for the crypto industry, all to be elements which will make up the Digital Asset Basic Act (DABA).

Before that, legislators are to revise key existing laws to also accommodate for the inclusion of security tokens. Amongst the bills that are to be amended are the Capital Markets Act and the Electronic Securities Act, scheduled to be put forth to the National Assembly by Q2 2023.

For now, guidance has advised firms to self-regulate – which requires entities like token issuers and brokers to declare whether a token is a security. 

The guidance also requires crypto players to self-classify and assess their token portfolio to see if they have to report and regulate their tokens under the new securities regime. 

If a firm in South Korea does not hold securities-related licences, it would have to obtain appropriate licences to legally operate within the country. Depending on the type of business  and licences required, it may take from one to two years to start operations in South Korea.

In the meantime, businesses and regulators have to reach a clear agreement on what a security is defined as, for better regulation. The Financial Services Commission currently has detailed guidance for what qualifies as a security, but is likely to assess each token on a case-by-case  basis.

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