South Korea has a deserved reputation as a global leader in blockchain technology. The Bank of Korea, almost uniquely for a central bank, has openly acknowledged the “usefulness” of stablecoins. Domestic blockchain platforms, such as Anchor Protocol, have seen huge jumps in popularity within the country. The country is a world leader in metaverse innovation, as reflected in the performance of metaverse-linked Korean ETFs, many of which saw double-digit gains last year, even as the Kopsi benchmark declined.
For any market to be successful, it needs to have a sophisticated and carefully crafted regulatory environment. The rules need to be flexible enough to encourage risk-taking and innovation. But they also need to protect consumers from bad actors. While this sounds simple, getting the balance right can be tricky. How is South Korea approaching this issue? To find out, #DisruptionBanking spoke to Chloe Lee in Seoul. Chloe is a Partner at the law firm Lee & Ko. She’s also the Co-Head of the NFT Team and specialises in blockchain regulation.
Chloe began by broadly summarising the Korean government’s stance on this: “boost blockchain innovation, deter crypto speculation and crimes.” Indeed, given all the controversies surrounding the collapse of Seoul-based Terraform and the disappearance of Do Kwon, South Korea has certainly experienced the terrible effects of criminal activity. This has perhaps been aggravated by the “legal vacuum” which still exists around crypto, digital tokens, and blockchains:
Chloe outlined some of the measures that the government has brought forward to try and protect retail investors. “Since 2017, the Korean government has announced countermeasures against excessive cryptocurrency speculation and related criminal acts, prohibited financial companies from certain crypto-related activities, such as investments in crypto, and banned Initial Coin Offerings (ICOs),” Chloe said. She also added that the Korean Anti-Money Laundering Law was amended in 2020 “to apply the anti-money laundering obligations to Virtual Asset Service Providers (VASPs),” while income tax regulations were similarly updated to ensure that capital gains tax applied to crypto trading. In other words, the government appears to be modernising existing rules to ensure that decentralised technologies are covered by the same basic laws that apply to any other technology.
Despite taking a stringent approach in this sense, it’s also clear that the government is committed to promoting and boosting blockchain innovation. Much of this innovation is happening in Busan, South Korea’s second largest city after Seoul. The government has made Busan a “regulatory sandbox” by designating the city the “Busan Blockchain Regulation-Free Special Zone.” The idea is to promote both local innovation and to encourage global blockchain players to set up in Busan. Just this week, crypto.com has become the latest to do so:
This is a clear example of the law being deliberately designed to encourage blockchain innovation. Chloe told #DisruptionBanking that “Busan was designated as a regulation-free special zone for blockchain related businesses under the “Act on Special Cases concerning the Regulation of Regulation-Free Special Zones and Specialised Regional Development.”
“A regulation-free special zone is a zone for a specific city or province, designated and publicly notified by the Minister of Small and Medium-Sized Enterprises (SMEs) and Start-Ups, to promote an innovative project or strategic industry in a specific area. In the zone, regulation is relaxed or there are exemptions.”
Despite the potential of Busan, Chloe did note that there are still a number of “regulatory uncertainties” which have created a “somewhat unfavourable regulatory environment for industry participants” that has even prompted some to look overseas. As a result, the government is looking to clarify the situation and introduce a thorough, developed set of rules. “The government is working on making Guidelines for Security Tokens and also introducing a (tentatively named) Digital Asset Framework Act,” Chloe said.
“Both are expected to provide more clarity on regulation to the market,” she added.
Chloe also argued that clarification is required to distinguish between cryptocurrencies which act in a similar fashion to securities, and those which serve another purpose altogether. A similar debate is taking place globally, particularly in the United States. Gary Gensler’s Securities and Exchange Commission (SEC) is battling Rostin Benham’s Commodities Futures Trading Commission for jurisdiction over digital assets. Gensler claims that all cryptos are securities, and should therefore be regulated by him and the SEC.
But Chloe believes that, in South Korea at least, “the regulation on crypto and blockchain will have to be twofold by nature.”
“For those which are similar to securities, the existing law that regulates capital markets may be applied. The problem here is that the law was not established with this new blockchain technology in mind,” she said. “On the other hand, for those which are not securities, there is no standalone law which can regulate them for the purposes of securing consumer protection and sound market practices. The Korean government is working hard to regulate both types separately, considering each one’s characteristics.”
Although establishing this regulatory environment will undoubtedly be a challenge, Chloe is bullish on the future of South Korea’s blockchain space. An abundance of highly educated human resources, world-leading digital infrastructure, and a young and tech-savvy population are just some of the advantages she highlighted. She is confident that “not only VASPs or crypto service providers will be utilising blockchain technology, but also conglomerates and other companies for their various business sectors,” as a unique way to add further value to their services.
But if the full value of blockchain technology is to be unlocked, Chloe thinks that the government, just as much as start-ups and businesses, will need to be “agile, flexible, and forward-thinking.”
“Global competitiveness will have to come not only from the private sector, but also from the government’s policy direction.”
Author: Harry Clynch
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