An extract from The Virtual Currency Regulation Review, 3rd Edition
Introduction to the legal and regulatory framework
There is considerable public interest in cryptocurrencies and blockchain in Korea.2 For example, on 16 January 2018, a petition to the President entitled Opposing Cryptocurrency Regulation garnered more than 200,000 signatures.3 On 14 February 2018, the government responded to the petition by stating that it considers the transactional transparency of cryptocurrencies to be of paramount importance, but that it will also promote blockchain technology.
As such, the government conceptually differentiates policies related to cryptocurrency from those of blockchain technology. Although some regulations have been introduced to curb speculative investment in cryptocurrency, the government has highlighted the innovative nature of blockchain technology in many different industries. It has also expressed its interest in fostering, promoting and investing in blockchain technology as part of its strategic and economic plans for Korea to be a leader in the Fourth Industrial Revolution.
However, there is no coherent insight on how cryptocurrencies would be classified under Korean law. The Financial Supervisory Service issued a press release on 23 June 2017 to announce its views on what cryptocurrencies are not from a financial regulatory perspective:4 namely, cryptocurrencies are not considered fiat currencies, prepaid electronic means or electronic currencies, or financial investment instruments. Unfortunately, the press release did not provide any guidance on how cryptocurrencies are classified and in what legal form. In addition, cryptocurrencies are not insured by the Korean Deposit Insurance Corporation.5
The government is largely concerned with the protection of investors and consumers of cryptocurrency. It has shown particular concern regarding cryptocurrency-related illegal activities, such as multilevel schemes and money laundering; accordingly, on 5 March 2020, the National Assembly of Korea passed the Amendment to the Act on Reporting and Use of Certain Financial Transaction Information, which expands anti-money laundering obligations to virtual asset service providers. However, the government has reiterated that the regulation of cryptocurrency transactions does not signify endorsement or institutionalisation of cryptocurrencies.6
The Supreme Court of Korea ruled on 30 May 2018 that cryptocurrencies can be confiscated as criminal proceeds.7 This decision represents the first time the Supreme Court has recognised cryptocurrency as property. However, given the narrow scope of its interpretation, it is unclear what impact this ruling will have on subsequent cryptocurrency regulation.
Classification of cryptocurrencies from a legal perspective has just begun in Korea and will likely develop in the near future. Other Korean regulatory authorities may have a different view from the Financial Supervisory Service's announcement and the legal classification of cryptocurrencies. As a result, there is currently no law or clear guidance from any regulatory authority in Korea that provides clarity on the legal classification of cryptocurrencies and how they will be treated under Korean law.
Securities and investment laws
The main legal framework governing securities and investment in Korea is the Financial Investment Services and Capital Markets Act (FSCMA). There is no existing regulatory regime or statute that incorporates cryptocurrency into Korean securities and investment laws.
The FSCMA defines securities as:
financial investment products for which investors do not owe any obligation to pay anything in addition to the money or any other valuables paid at the time of acquiring such instruments (excluding obligations to pay where an investor assumes such an obligation by exercising a right to effectuate the purchase and sale of an underlying asset), provided that there are certain securities, such as investment contract securities, which are only recognised as securities under the FSCMA when meeting certain conditions under the FSCMA.8
On the other hand, the FCSMA defines financial investment products as:
a right acquired by an agreement to pay, at the present time or a specific time in the future, money or any other valuables, for the purpose of earning a profit or avoiding a loss, where there is a risk that the total amount of such money or any other valuables, paid or payable, to acquire such right (excluding any sums specified in the Enforcement Decree, such as sales commissions) may exceed the total amount of money or any other valuables recovered or recoverable from the right (including any sums specified in Enforcement Decree, such as termination fees).9
It is currently unclear whether cryptocurrencies qualify as securities or financial investment products under the FSCMA. In a series of press releases, Korean financial authorities have taken the position that cryptocurrencies or cryptocurrency assets are not a financial investment product under the FSCMA.10 However, these announcements were made in the context of cautioning potential investors, and thus do not adequately address whether cryptocurrencies qualify as financial investment products under the FSCMA.
There is no explicit prohibition on the registration of cryptocurrency-related investment funds. A licence must be acquired to provide advice on financial investment products in Korea. Since an investment fund's underlying asset need not be financial investment products under the FSCMA, an investment fund may, in theory, include cryptocurrencies or cryptocurrency assets as its underlying assets. However, it is unclear whether the Korean financial regulators will be receptive to such investment funds. To date, there are no cryptocurrency-based investment vehicles or funds registered with the Korean financial regulatory agencies.
On 1 September 2017, the Financial Services Commission (FSC) announced a ban on margin trading, prohibiting individuals from borrowing funds or cryptocurrencies from cryptocurrency exchanges to sell them.11 The FSC has declared that this practice violates existing Korean lending and credit laws. It has further directed financial institutions to halt all transactions and partnerships that enable margin trading.
Banking and money transmission
On 4 September 2017, the FSC announced that it would initiate an identification policy for accounts in cryptocurrency exchanges that requires cross-checking user names and account numbers. On 30 January 2018, the FSC introduced the Real Name Verification System.12 Under the Real Name Verification System, users who want to make a cryptocurrency transaction must have a bank account under their real name at the same bank with the cryptocurrency exchange. Existing anonymous account users can only withdraw money and may not make any further deposits. The Real Name Verification System further bans minors (under the age of 18) and foreigners from opening new cryptocurrency accounts.
There are no explicit border restrictions or obligations to declare cryptocurrency holdings. However, for fiat currencies, the Foreign Exchange Transaction Act (FETA) and the Foreign Exchange Transactions Regulations (FETR) regulate the remittance of funds out of Korea to overseas accounts. Generally, there must be a legal basis, along with supporting documents as prescribed under the FETA, to repatriate funds overseas. Examples of a legal basis include loan repayments, dividend payments and sale proceeds payments. The FETA prescribes certain procedures and documents for each type of transaction listed in the FETA for both the remitter of funds and the bank handling the remittance. Each type of transaction has different procedures and requirements to remit funds overseas. Generally, under the FETA, all outbound remittance in an amount exceeding US$3,000 per transaction or a yearly aggregate limit of US$50,000 must be reported to and approved by the Bank of Korea (BOK).
There are no guidelines regarding cryptocurrencies under the FETA or the FETR. In practice, however, Korean banks decline to process wire transfers overseas when related to cryptocurrency trading, even if the amount is below the monetary limits and would not trigger the reporting requirements to the BOK or designated foreign exchange bank under the FETA.
Moreover, for overseas payments using cryptocurrencies, there are no reporting requirements at this time to any Korean regulatory agency. However, there are requirements being developed by the Korean financial regulators that may require a filing requirement with the BOK for foreign exchange purposes.
On 9 January, 2018, the BOK launched a task force on cryptocurrency and is reviewing a central bank-backed cryptocurrency as part of the project. In addition, various local governments in Korea are exploring the option of issuing their own cryptocurrency.