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NFT collectibles to be excluded from scope of Korea's first cryptocurrency law

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Cryptocurrency law on investor protection to take force from mid-July
By Anna J. Park

Non-fungible tokens (NFTs) will be excluded from the scope of virtual assets defined under the Act on the Protection of Virtual Asset Users, which will come into effect July 19. The act will be Korea's first legislation on cryptocurrency and its investor protection.

This is according to the guidelines announced by the Financial Services Commission (FSC), Korea's top financial regulator, on Monday, aiming to give a set of clear criteria to determine whether NFTs would fall into the category of virtual assets or not.

The authorities explained that the primary reason for excluding NFTs from the scope of the virtual asset law is their low likelihood of causing harm to users. NFTs are typically issued in limited quantities and traded primarily as collectibles, such as videos or images.

"Due to these characteristics, the number of NFT holders is also limited. Unlike other cryptocurrencies, there are constraints on their secondary transactions, making them less likely to harm a massive number of users. Additionally, NFTs can be categorized as a new type of digital asset that can foster the blockchain industry, thereby requiring regulatory innovation," the FSC said.

However, in cases where an NFT is functioning as a kind of virtual asset in actual substances, it will be subject to the virtual asset law.

"The legal nature of NFTs should be judged on a case-by-case basis, focusing on their substance rather than their name or technology, and comprehensively considering all relevant factors, including issuance, distribution structure, terms and conditions, advertising and the nature of the business and services," the top financial regulator stated.

Korea's regulatory stance on NFTs can be said to be similar to those of other major countries, where the legal nature of NFTs is determined by their substance, rather than their external form or technologies applied.

In the U.S., NFTs are subject to securities regulations in the same way as virtual assets, when they are evaluated to have the characteristics of securities. Last year, the U.S. Securities and Exchange Commission (SEC) imposed sanctions on some NFTs for failing to comply with securities issuance procedures, as the NFTs were qualified as securities, or in other words, investment contracts.

Japan also applies regulations, such as those for securities and virtual assets, based on NFTs' substantive nature. Similarly, Germany's Federal Financial Supervisory Authority (BaFin) issued a judgment principle under which that if NFTs have similar rights to securities and are transferable, they qualify as securities, and if they are used as a payment method or for investment purposes, they qualify as virtual assets.

Park Ji-won annajpark@koreatimes.co.kr


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