Yulchon's Head of IP & Technology Practice Group Son Do-il, center, speaks during an interview with The Korea Times at the law firm's headquarters in southern Seoul on March 6. From left, Head of New Industry IP Team Lim Hyeong-joo, Son, and Lee Han-kyeol, associate and patent attorney at the firm. Courtesy of Yulchon
While Korea's first law on cryptocurrency, Act on the Protection of Virtual Asset Users, is scheduled for implementation this July, the nation still trails behind global powers in providing legal frameworks for the advancement of the virtual asset industry, intellectual property (IP) lawyers from a major law firm say.
During an interview with The Korea Times, IP lawyers at Yulchon — a major law firm in Korea — said that Korea was initially considered agile among advanced countries in introducing regulations over virtual asset service providers by swiftly making amendments to existing domestic financial transactional law, as well as in passing the first crypto bill focusing on investor protection at the parliament last summer.
Yet, the Korean government fell behind in filling a regulatory gap faced by many crypto business operators in key matters, such as types of cryptocurrency businesses allowed in the country and rules on virtual asset issuances and disclosure requirements of such assets, which are essential for further development of the virtual asset industry.
"While regulations regarding virtual asset issuances and stablecoins are becoming clearer and more standardized in the United States and Europe, Korea's legal structures still lack clear regulatory guidance concerning a variety of important issues in the cryptocurrency industry, including rules on initial coin offerings (ICOs) and disclosure requirements," Lim Hyeong-joo, head of the law firm's New Industry IP Team, pointed out during the interview at the headquarters of Yulchon in southern Seoul.
Yulchon's Head of New Industry IP Team Lim Hyeong-joo speaks during an interview with The Korea Times at the headquarters of the law firm in southern Seoul on March 6. Courtesy of Yulchon
The partner lawyer, with expertise in cryptocurrency and blockchain technologies, highlighted that one of the most distorted parts of the domestic virtual asset market is Korea's outright ban on ICOs. The ban on ICOs dates back to September 2017, when the financial authorities introduced the prohibitive policy. Since then, domestic coin issuers have been conducting ICOs in foreign countries like Singapore to circumvent the domestic ban.
"Financial authorities' current priority lies in investor protection. However, inadequate regulation on cryptocurrency business operators is hindering the proactive development of the virtual asset markets in Korea," Lim said, stressing the need for additional legislation on the virtual asset industry in a timely manner. "Instead of imposing a blanket ban, it would be more desirable to establish clear criteria for ICOs."
In fact, the call from various sectors urging the government to lift the ban on domestic ICOs has persistently been advocated for the sake of fostering innovation in financial and tech industries in the country. In response to such voices, the Yoon Suk Yeol administration pledged to include the allowance of ICOs as one of the key policy objectives in the cryptocurrency sector at the outset of its term in 2022.
Following the passage of the nation's first crypto bill focusing on investor protection at the National Assembly last year, which will take effect this summer, both the financial authorities and parliament have vowed to develop a second-phase crypto legislation promptly, aiming to fill the regulatory gaps on crucial aspects, such as the virtual assets' disclosure system, rules on the ICOs, stablecoins and virtual asset operators .
However, completing the parliamentary procedures for the second-phase law is now anticipated to require more time than initially expected, as many aspects of the proposed law remain undecided and subject to ongoing discussions."
"Given the recent substantial growth in virtual assets and the approval of Bitcoin ETFs in the U.S., it appears inevitable that new legislation reflecting these developments will be proposed, adding to the numerous other bills already pending in the parliament. Consequently, passing the second-phase law by the second half of this year may prove quite challenging," Lee Han-kyeol, an associate at the law firm, said during the interview.
Lee Han-kyeol, a patent attorney at Yulchon, speaks during an interview with The Korea Times at the headquarters of the law firm in southern Seoul on March 6. Courtesy of Yulchon
Lee, also a patent attorney, said that in the U.S., many of the core issues surrounding cryptocurrency regulations — whether virtual assets should be classified as securities or commodities, whether non-fungible tokens (NFTs) or stablecoins should fall under crypto regulations, and which federal regulator, the Securities and Exchange Commissions or the Commodity Futures Trading Commission, should hold primary supervisory control over the sector — have been debated in-depth both in the U.S. House Representatives and in courts, with many of the issues getting clarified through the process.
Likewise, the European Union has introduced proactive legislation regarding virtual asset regulations through “The Markets in Crypto Assets,” a landmark legal framework for the cryptocurrency sector set to be enacted later this year. The legislation not only delineates regulatory requirements for investor protection but also for coin issuances and stablecoins.
“In that regard, in countries — the U.S. and nations of Europe — regulations concerning some of the most contentious issues in the virtual assets and cryptocurrency markets have been actively clarified to some extent, although there may be differences in the degree of intensity in such regulations among each country. However, in Korea, there still appears to be a lack of regulatory clarity on many key issues within the cryptocurrency sector,” the patent attorney said.
Yulchon's Head of IP & Technology Practice Group, Son Do-il, speaks during an interview with The Korea Times at the headquarters of the law firm in southern Seoul on March 6. Courtesy of Yulchon
Son Do-il, the head of Yulchon's IP & Technology Practice Group and a former judge, said Korea's unique legal characteristics also present realistic challenges in outpacing other countries in cryptocurrency legislation.
He said the conservative and passive approach of Korean financial authorities in cryptocurrency legislation could be attributed to several systemic differences in criminal prosecution between the U.S. and Korea.
"It can be seen from a perspective of one's expected benefits and disadvantages when one decides to commit a fraudulent act in the cryptocurrency sector. In the U.S., the expected consequential price to pay for a fraudulent act, in terms of the length of jail term, is immensely severe," Son said. "It is also easier for authorities to freeze all the assets related to criminal acts. Conversely, Korea's penal system is not only more lenient than the U.S. toward criminals, but it also requires much stricter evidence to confiscate the proceeds of crime."
"It's not easy to trace and prove the assets are directly related to criminal acts."
He added, "Thus, I think these differences in legal systems may also contribute to the U.S.'s greater ability to open up cryptocurrency markets, compared to Korea."
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NFTs not included in first-phase crypto law
Meanwhile, NFTs, central bank digital currencies and various types of electronic tokens are excluded from the scope of the Act on the Protection of Virtual Asset Users, the first-phase cryptocurrency act set to take effect in July this year. The IP lawyers anticipate that the Korean financial authorities will issue guidelines on NFTs to offer further regulatory clarity on these virtual assets.
"Currently, financial authorities appear to be distinguishing NFTs of a collectible and art nature from other types of virtual assets. This stance can be inferred through the security token offering (STO) guidelines issued by the Financial Services Commission in early 2023. It is expected that the top financial regulator will further clarify their criteria for this virtual asset class through the issuance of new guidelines," Lim said.
Lee said that collectible or art NFTs, primarily intended for collection purposes, are likely to be treated differently than traditional virtual assets, but some may be treated similarly to fractional investments like STOs. In contrast, NFTs issued in a manner closely resembling traditional cryptocurrency assets may fall under crypto regulations.
"With regards to NFTs that are issued in an identical manner with cryptocurrencies and function similarly to them, despite being labeled as NFTs, they essentially utilize and leverage blockchain technologies. Consequently, it is expected that future NFT guidelines would encompass these NFTs as cryptocurrency assets," Lee said.
Cryptocurrency markets to introduce new biz
Son emphasized that the potential benefits of the growing virtual asset markets for the economy should be comprehensively considered, such as their ability to expand the market by fostering innovation.
"An economy that relies solely on supporting large conglomerates can never truly thrive. Ultimately, it is essential for small businesses to achieve robust growth for the economy to surpass the $50,000 per capita income threshold. While traditional investment markets often face challenges in directing essential capital to these smaller companies, it's crucial not to disregard the potential positive impact that cryptocurrency markets can have in this aspect," Son said, highlighting that financial authorities might need to approach legislation on virtual asset markets with the goal of devising innovative ways to finance brilliant and promising ideas from venture companies.
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Law still in process of forming at courts
When asked about unique traits of legal cases related to cryptocurrencies, the lawyers mentioned that one of the most distinctive features is that legal debates and court decisions on major issues of the virtual asset markets often occur before the government officially formulates rules and regulations for them.
"Typically, courts' applications and interpretations of certain regulations or laws come after such legislation has been implemented in practice. However, cases involving cryptocurrencies differ in that courts tend to present their interpretations preemptively, which are frequently taken into account during the formulation process of law and regulation," Lee stated.
Considering that crypto regulations are still in the process of being formulated across different countries, Lim underscored the importance of engaging in global discussions, as digital assets in nature transcend geographical boundaries.
"Since virtual assets inherently operate on a global scale without borders, it seems imperative to establish a unified global protocol collaboratively. Rather than any single country falling victim to the Galapagos syndrome — a term denoting isolated development of a globally available product — it would be beneficial for nations to openly discuss laws and regulations regarding virtual assets," Lim said.