Vice Chairman Kim Soyoung of the Financial Services Commission presided over the third meeting of the virtual asset committee on February 13 and held discussions with related ministry officials and private sector experts on the final policy measures aimed at allowing corporate transactions of virtual assets in the virtual asset market. At the meeting, the committee also discussed ways to bring about improvements to the best practice guidelines for listing virtual assets to help resolve the problem of listing competition among exchange service providers and reviewed the progress of regulatory reform regarding the introduction of security token offering (STO).
A Roadmap for Allowing Corporate Participation in the Virtual Asset Market
Background
The transaction of virtual assets by corporate entities has been prohibited in principle following government regulations introduced in 2017. At the time, in comparison to transactions by individuals, the government was concerned that corporate transactions of virtual assets could pose significant threats of money laundering and market overheating. Thus, the government decided to ban corporate transactions of virtual assets to help ease the highly speculative market conditions, and as a routine practice, banks have been restricting the opening of real-name verified accounts for corporations intended for virtual asset transactions.
However, with the implementation of the Virtual Asset User Protection Act from July 19, 2024, the legislative foundation has been established to provide protections for users. In addition, there have been changes in market environment with major countries around the world widely accepting corporate transactions of virtual assets and the demand for pursuing new blockchain-related business opportunities rising among domestic businesses. As such, there has been growing demand for permitting corporate entities to engage in virtual asset transactions in the domestic market. Against this backdrop, the virtual asset committee dealt with this agenda since the first meeting held in November last year to seek policy options, and held a series of sub-committee and working-level taskforce meetings thereafter to thoroughly review and come up with appropriate policy solutions.
Key Measures
The FSC and related organizations have prepared the following roadmap to gradually allow corporate transactions of virtual assets in stages. The measures have been drawn up with a particular attention given to ensuring protections for virtual asset users and market stability.
To begin with, in the first half of this year, the opening of real-name verified accounts for corporate entities will be permitted only for the purpose of selling virtual assets to liquidate them into cash.
For law enforcement agencies, such as Prosecutors’ Office, National Tax Service, and Korea Customs Service, which have the legitimate authority to confiscate criminal proceeds, real-name account opening has been already taking place since the end of last year. For non-profit corporations accepting donations and contributions with an adequate level of transparency guaranteed regarding their financial operations, and for designated organizations accepting donations and universities that are subject to supervision by related authorities, the real-name account opening will be permitted in the second quarter of this year. Since most non-profit corporations currently lack the process and the groundworks to accept virtual assets and liquidate them into cash, a taskforce of related organizations plans to provide support for the preparation of a minimum level of internal control standards needed. For virtual asset exchanges, they will be able to make use of the fees they receive in virtual assets, liquidate them into cash, and utilize the money for their operating costs. Considering the potential of conflict of interests that may arise between virtual asset exchanges and their users in the event of a large-scale sellout by exchange, this will be permitted gradually after virtual asset exchanges jointly prepare a set of guidelines for handling the sale of virtual assets.
In the second half of this year, a pilot test will be introduced to allow real-name account opening for certain types of institutional investors with adequate risk appetite. The aim of their transactions should be restricted within investment and financial purposes.
More specifically, a total of 3,500 corporate entities including listed companies and registered corporations classified as qualified professional investors defined under the Financial Investment Services and Capital Markets Act (FSCMA) will be subject to the pilot test, and financial companies will be excluded from this. Under the FSCMA, qualified professional investors are already eligible to invest in highly risky and highly volatile derivatives products, and these corporations have demonstrated significant demand for pursuing blockchain-related business and investment opportunities.
With an expanded level of corporate participation expected in the virtual asset market following this pilot test, the financial authorities will also strengthen safeguard measures. A set of transactions guidelines will be prepared to provide appropriate information for banks to strengthen verification of the purpose of transactions and the origin of funds, for virtual asset exchanges to make use of third-party custody and management services, and to expand information disclosures made available to investors. Since qualified professional investors may demonstrate different levels of investment capacities, the decision to ultimately issue a real-name verified account will be left to the thorough screening process from banks and virtual asset exchanges.
With regard to the corporate transactions of virtual assets by financial companies, the virtual asset committee recommended that a cautious approach is needed when considering the potential of risk contagion into the wider financial system. As such, instead of permitting their transactions of virtual assets directly, the authorities will seek to introduce various policy measures intended to support the issuance of security tokens through a legislation on STO and facilitate the expansion of investment in blockchain by financial companies.
For ordinary corporations that are not classified as qualified professional investors, the authorities will consider their qualifications after thoroughly reviewing the situation of the virtual asset market and the progress of the pilot test and once the second phase legislation on virtual assets and related regulatory reforms on foreign exchange and taxation systems are completed.
Making Improvements to the Best Practice Guidelines for Listing Virtual Assets
Recently, there have been ongoing concerns about the occurrence of extremely volatile movements in virtual asset prices right after they become listed and the problem of excessive competition for exclusive listing among exchange service providers, which may have the potential effect of resulting in inadequate screening prior to listing.
In this regard, the virtual asset committee held discussions on ways to prevent extreme price volatility immediately following the listing of virtual assets and to resolve the problem of indiscriminate listing practices based only on prevailing trends. In this regard, most committee members pointed out the need for self-regulatory efforts from the industry by upgrading the best practice guidelines for listing virtual assets introduced by the Virtual Asset User Protection Act.
More specifically, to prevent excessive post-listing price volatility, the committee discussed ways to bolster the pre-listing screening process by securing a minimum level of circulation, strengthening the listing criteria, and documenting the deliberation process to ensure faithfulness and credibility.
The committee also had discussions on the regulatory reform agenda concerning security tokens. A tokenized security (or security token) is a digitalized form of security that is legally defined in the FSCMA and makes use of the distributed ledger technology. Once a legislative foundation is established on security tokens, the issuance and circulation of various rights in the form of security tokens will be made easier and the cost burden will be reduced.
There are currently legislative revision bills (for the Act on Electronic Registration of Stocks and Bonds and for the FSCMA) pending at the National Assembly intended to legally incorporate tokenized securities into the scope of electronic securities and newly establish the “issuer” account managers that will be allowed to issue security tokens independently without having a securities company as an intermediary. To facilitate a speedy reform on security tokens, the virtual asset committee shared the need to actively participate in the parliamentary discussion process.
Further Plan
The FSC plans to immediately set up a taskforce with the Financial Supervisory Service (FSS), Korea Federation of Banks (KFB), and Digital Asset Exchange Alliance (DAXA) and promptly work to prepare internal control standards for allowing corporate participation in the virtual asset market and the guidelines for the sale and transactions of virtual assets. In addition, the FSC will strengthen communication with market participants to support and ensure a seamless implementation of corporate participation in the virtual asset market.
* Please refer to the attached PDF for details.