South Korea’s Crypto Firms Will Have to Self-Regulate Under New Guidance

South Korean securities firms and token issuers now have some clarity on how security tokens are defined under new guidance published Monday.

South Korea’s Financial Services Commission has defined security tokens as tokens that are digitized using distributed ledger technology, thus bringing the country in line with other jurisdictions in the wider Asia region.

Under this guidance, the onus will first fall on firms to regulate themselves.

“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.

The regulatory clarity “should encourage digital asset innovation in South Korea’s capital markets,” Ang said.

Before the guidance was released, traditional securities firms had been cautious about entering the market.

“The basic stance that the securities law may apply to tokens was similar [to the U.S.],” said Mooni Kim, foreign attorney at law firm Kim & Chang. “The question of ‘How?’ always followed.”

Players in traditional finance that already hold securities licenses are already responding. One is Shinhan Investment and Securities, one of the country’s largest securities companies, which has invited other companies to join an alliance to inform investors of the benefits of token securities and set standards and best practices for issuing and trading.

“Securities firms seem to have some hope for it, but I don’t think it will impact our business that much,” said a crypto exchange executive who spoke on condition of anonymity to preserve his relationship with local regulators. He said that he did not see the guidance as a sign that the regulators were encouraging the crypto industry.

“Securities are already available on the securities market,” he said. “Perhaps accurately defining the asset types should come first.”

He said that he was waiting on the outcome of the U.S. Securities and Exchange Commission lawsuit again Ripple. He doesn’t want South Korea to rush ahead of the rest of the world when it came to regulating.

“It’s good for investors,” this executive said of the guidance, because the “Korea Securities Depository will control the total amount of issued assets and keep an eye on token issuers.”

Last year, South Korean gaming company Wemade allegedly gave a false disclosure on the number of Wemix tokens it issued, leading to major crypto exchanges to delist Wemix.

Legislators will next reshape key existing laws to cover security tokens. Regulators will propose amendments to the Capital Markets Act and the Electronic Securities Act, which will be put forward to the National Assembly in the first half of this year.

Following the collapse of the Terra system’s UST stablecoin last year, South Korea’s regulators have worked towards tougher protections for consumers and drafting a regulatory framework for the crypto industry, which will eventually take shape in the Digital Asset Basic Act.

Still, firms will be taking the first step by self-regulating. The guidance requires interested parties, such as issuers and brokers, to determine whether or not a token is a security.

Crypto players will have to go through their own classification and assess their related tokens to see if they have to put themselves forward to be regulated under the securities regime, Kim said.

Firms that don’t hold securities-related licenses will have to go through the process of obtaining licenses which can take one to two years, depending on the licenses and the business model of the company.

Ang expects to see growing pains as businesses and regulators reach agreement on what is and what is not a security.

Still, “the FSC provides detailed guidance to help inform that decision and will likely assess each determination on a case-by-case basis,” Ang said.