NFTs
South Korea’s FSC issues guidelines for NFTs to be considered virtual assets
South Korea’s Financial Services Commission (FSC) will consider several factors, including the issuance and distribution structure and service content, to determine the nature of NFTs.
In a significant development ahead of the implementation of the Virtual Asset User Protection Law in mid-July, South Korea’s Financial Services Commission (FSC) announced new guidelines for determining whether Non-Fungible Tokens (NFTs) are considered virtual assets. The guidelines, released on June 10, aim to increase predictability and facilitate the application of the new law.
The FSC noted that NFTs, which are unique digital tokens often used to collect content such as videos or images, have limited holders and secondary trading. This reduces the likelihood of widespread user harm compared to other virtual assets. Recognizing the unique nature of NFTs, the FSC has emphasized the need for regulatory innovation to support the growth of the blockchain industry.
NFTs are typically issued in limited quantities and are not easily exchangeable, unlike cryptocurrencies. The FSC will consider several factors, including the issuance and distribution structure and the content of the service, to determine the nature of NFTs. NFTs issued in large quantities, those that can be divided or those used as direct or indirect means of payment can be classified as virtual assets. On the other hand, NFTs with limited economic value or use are less likely to be considered virtual assets.
The FSC highlighted that major countries judge the legal nature of NFTs based on their substance and not their form or technology. For example, the US Securities and Exchange Commission (SEC) has regulated some NFTs as securities, applying securities regulations to them. Japan applies financial regulations to NFTs based on their substance and issued NFT guidelines through a private association in 2021. Germany’s BaFin considers NFTs as securities if they have similar rights and are transferable, or as virtual assets if used. for payment or investment purposes.
Jeon Yo-seop, Head of Financial Innovation Planning Division, addressed journalists in the morning of the same day, stating: “NFT transactions cannot be uniformly regulated like virtual assets, but occasional transactions will not be subject to such regulation ”. This approach aims to avoid excessive regulation and align with the policy objective of promoting NFTs.
The FSC has also outlined the responsibilities of companies dealing with NFTs, requiring them to determine whether their NFTs are virtual assets and comply with relevant laws. This measure aims to ensure legal compliance and avoid criminal sanctions. Prospective NFT issuers and handlers are advised to review the legal nature of their NFTs in advance to ensure compliance with government positions and related laws.
To help companies struggling with self-assessment, the FSC will enable consultations with financial authorities and plans to operate a related working group. This support aims to help companies determine the status of NFTs’ virtual assets and effectively navigate the regulatory landscape.
“Given that the ‘Virtual Asset User Protection Act’ is being implemented for the first time this year, we have prepared these guidelines to provide clear criteria for determining whether NFTs are virtual assets, thereby increasing the predictability of the law and facilitating its application, “, stated the FSC.
Understanding the context of these guidelines requires knowledge of NFTs, blockchain technology, and the global regulatory environment. NFTs are unique digital assets verified using blockchain technology, often representing ownership of digital or physical items. Blockchain is a decentralized digital ledger that guarantees the security and authenticity of transactions. Virtual assets, including cryptocurrencies, are digital representations of value that can be traded or transferred electronically, and governments around the world are increasingly focused on regulating these assets to protect users and prevent fraud.
South Korea has been proactive in regulating the cryptocurrency market, and the introduction of the Virtual Asset User Protection Law reflects the government’s efforts to create a legal framework to protect users and ensure financial stability. Different countries have varying approaches to regulating NFTs, with the US, Japan and Germany providing frameworks based on the use and characteristics of NFTs.