South Korea will regulate some NFTs as cryptocurrencies to ensure transparency and safety for users under new FSC regulations.
South Korea has just issued new guidance from the Financial Services Commission (FSC) on regulating NFTs (Non-Fungible Tokens). This new regulation will apply to NFTs that lose their uniqueness and become exchangeable, divisible and usable as cryptocurrency.
Accordingly, if an NFT is mass-created and used as a means of payment, it will be listed as a cryptocurrency. This is to ensure that NFT-related activities are transparent and protect user rights. In contrast, NFTs with low or non-transferable economic value will still be considered regular NFTs, such as NFT tickets for events.
An FSC representative said that this classification will be done on a case-by-case basis. The regulation also proposes that an NFT can be considered a security if it meets the criteria under the Korean Capital Market Law.
New legal framework for cryptocurrencies in Korea
These instructions were issued just before the Virtual Asset User Protection Law officially took effect on July 19. This law aims to eliminate illegal practices such as using inside information to invest in cryptocurrencies, market price manipulation, and fraudulent trading. At the same time, the law requires cryptocurrency service providers to protect the majority of customer deposits in cold wallets and participate in insurance programs to compensate in the event of security breaches.
Once the Virtual Asset User Protection Law is implemented, NFTs that are commonly traded for ‘collectible’ purposes will be excluded from the scope of virtual assets. For opaque NFTs, the application of the law depends on the nature of the NFT, defined in the order ‘securities → virtual assets’. First, it must be determined whether an NFT is a security or not, then its nature is determined to see if it belongs to virtual assets.
Determining whether an NFT belongs to a virtual asset is based on the following criteria:
1) Large release or series of large-scale releases with high substitution;
2) Can be divided, significantly weakening uniqueness;
3) Direct or indirect payment method for specific goods or services;
4) Virtual asset exchanges may be conducted between unknown individuals, or may pay for other virtual asset related goods or services.
This new regulatory framework is part of South Korea's efforts to create a secure and transparent cryptocurrency environment. The next part of this regulation, currently in development, will focus on standardizing token issuance and investor disclosure towards a healthy and sustainable cryptocurrency market.
