Towards a Comprehensive Regulatory Framework: A Statement on South Korea's Virtual Asset User Protection Act
As Co-Chairs of the International Digital Asset Exchange Association, we appreciate South Korea's National Assembly's initiative in passing the Virtual Asset User Protection Act on June 30, 2023. However, supplementary legislation related to virtual asset issuance and financing by Virtual Asset Service Providers (VASPs) is needed to fully integrate the virtual asset industry into South Korea's institutional system.
While previous regulatory reforms focused on user protection and regulation of unfair trade practices, immediate preparation is underway for legislation supplementing regulations related to market order, such as virtual asset issuance and disclosure.
Following the passage of the Virtual Asset User Protection Act, the Financial Service Commission (FSC) is discussing second-stage legislation. The National Assembly has ordered research services for this second-stage legislation to resolve conflicts of interest that VASPs generate in the process of issuing and distributing virtual assets. The research will include plans to resolve conflicts of interest, regulation systems for stable coins, virtual asset evaluation business, advisory business, public disclosure business, and uniform distribution and issuance of virtual assets.
Additionally, sub-statutes, such as enforcement decrees to elaborate the Virtual Asset User Protection Act, are being discussed. It is unclear whether the regulation will apply to virtual asset custody, deposit, and operation operators. For instance, Delio, a registered VASP in Korea, and Haru Invest, a non-registered VASP serving Korean clients, could circumvent regulations in the current legislative system.
This initiative is significant progress, and we must ensure our domestic regulatory approach is balanced, considering both domestic and international regulatory trends. As global regulators like the Financial Action Task Force (FATF), the Financial Stability Board, and the International Organization of Securities Commissions continue to provide guidance on cross-jurisdictional digital asset regulation, South Korea must take an informed approach in a comprehensive regulatory framework to address the second stage of legislation while carefully reviewing existing regulatory gaps.
The current VASP regime in Korea will be reviewed to provide clearer guidance to comply with the FATF recommendation. Under FATF, a VASP must be a natural or legal person conducting one or more of the prescribed activities for or on behalf of another natural or legal person. A natural or legal person trading virtual assets solely on its own behalf and out of its own proprietary funds should not fall into the VASP licensing scope, given that it is not conducting the activities for or on behalf of another natural or legal person. Under a Risk-Based Approach, it’s therefore reasonably understandable that the ML/TF risks associated with virtual assets would arise while conducting business for or on behalf of another natural or legal person.
We must continue the conversation with government and industry stakeholders to ensure that the regulatory framework is robust enough to protect consumers and promote continued investment. It's imperative that we work towards creating a comprehensive regulatory framework that aligns with international standards given the global nature of this financial technology.
We urge the government to engage in a more productive dialogue with the industry and encourage all stakeholders to develop a comprehensive regulatory framework for digital assets that meets the needs of both consumers and businesses. We also encourage stakeholders to align with global harmonized frameworks and remove any impediments to the growth of the industry and its ecosystem, in line with the recommendations of the FATF, FSB, and IOSCO. The International Digital Asset Exchange Association is committed to working with both the Korean government and industry to achieve this goal.
Loretta Joseph & James (JungHweon) Jeon
International Digital Asset Exchange Association