South Korea’s Evolving Regulatory Landscape for Cryptocurrencies: What to Expect

South Korea’s Evolving Regulatory Landscape for Cryptocurrencies: What to Expect

South Korea’s cryptocurrency industry is bracing for an impending shakeup as policymakers set their sights on regulation. The government’s primary objective is to safeguard investors by stamping out any fraudulent activities that may be lurking within the industry’s dark corners. While the specifics of these regulations remain unclear, one thing is certain: change is coming.

FIU Takes Action

South Korea has been actively engaged in the regulation of its digital asset market. In the latest development, the country’s Financial Intelligence Unit (FIU) has taken stringent measures against five cryptocurrency exchanges, namely Bithumb Korea, Coinone, Dunamu, Korbit, and Streami, for their blatant disregard of regulations pertaining to the reporting of irregular crypto trading. The exchanges have been found negligent in their duty to monitor and report suspicious transactions diligently, resulting in the discovery of several instances of irregular trading practices. The detected irregularities include using borrowed-name bank accounts for transactions and grossly insufficient internal controls.

Notably, the FIU unearthed one case of a 95-year-old man engaged in late-night trading of over 30 different types of cryptocurrency, covertly splitting his money into smaller amounts to avoid detection. In another instance, a customer repeatedly withdrew money promptly after large virtual asset deposits had been made, raising suspicion of wrongdoing. On top of these, the FIU found that one of the board members of a cryptocurrency exchange was involved in transactions using their spouse’s name, further underscoring the lackadaisical attitude towards internal controls.

As a result, the FIU has levied substantial fines and issued disciplinary warnings on the exchanges, with the potential to order further improvements if the corrective actions taken by the exchanges are deemed inadequate. The fines amount to a staggering 490 million won, and the exchanges have been given a strict deadline of three months to address the identified suspicious transactions. The neglect of duty by the cryptocurrency exchanges and the discovery of various irregular trading practices emphasize the urgent need for stricter regulations and improved monitoring mechanisms to thwart illegal activities such as money laundering in the crypto market.

Parliament Expected to Pass New Digital Asset Bills

The South Korean parliament is expected to pass a bill regulating the digital asset market in April 2023, which was proposed at the end of 2022. Currently, 18 digital asset bills are being debated in the Political Affairs Committee of the National Assembly of South Korea. These bills are part of the proposed Virtual Assets Act, which aims to regulate the digital asset market in South Korea. The bills cover a range of topics, including amendments to the Exchange Act and the Specific Financial Information Act, and the establishment of new regulations.

Out of the 18 bills, 11 are related to virtual assets, 4 are amendments to the Exchange Act for electronic financial services, 2 are amendments to the Specific Financial Information Act, and 1 is related to establishing financial institutions for digital assets. The parliament members have expressed their belief that the bill to regulate the digital asset market would likely be passed in April, owing to the intense debates that have been taking place in the Political Affairs Committee, with members narrowing their differences. Members of the first subcommittee have shown a keen interest in the bill and are expected to pass 18 digital asset bills by the end of the month.

The regulatory landscape for cryptocurrencies in South Korea is rapidly evolving, with new laws being proposed and enforced in response to the growing popularity of digital assets.

Actions Determine the Future

The government is willing to take legal action against crypto companies that engage in fraudulent activities. South Korean prosecutors also seek to extradite Do Kwon, a crypto entrepreneur accused of a multibillion-dollar fraud, to face charges in South Korea. Do Kwon was taken into custody in Montenegro, and South Korea and the US requested his extradition. There have also been attempts to arrest another Co-Founder of Terraform Labs, Shin Hyun-Seung, or Daniel Shin, in connection with the investigation into the collapse of the Terra-Luna cryptocurrency. Still, a South Korean court has twice dismissed the request for his arrest. This suggests that the government is willing to take legal action against crypto companies that engage in fraudulent activities.

With protecting their investors in mind, the domestic market has picked up a lot of confidence. They have seen a resurgence of cryptocurrency trading, particularly in XRP tokens. The trading volume for XRP has spiked to billions of dollars on top Korean exchanges like UpBitBithumb, and Korbit. In fact, XRP has overtaken Bitcoin in volume on the top 4 Korean exchanges.

crypto stats

Source: CoinGecko

They are taking steps to regulate the cryptocurrency industry and protect investors. There are also rumours that regulators have started to take notice of foreign cryptocurrency exchanges operating in South Korea through various affiliate marketing programs, social trading, and decentralized wallets. It seems like they will block domestic access to foreign cryptocurrency exchanges that lack the proper registration to operate in the country in due course. Previously, FIU has notified authorities that 16 firms allegedly violated this rule. Violating the registration requirements carries a maximum sentence of five years in prison or a fine of up to 50 million South Korean won (US$38,000).

Ending Remarks

South Korea’s efforts to regulate the rapidly evolving cryptocurrency landscape must be applauded for their aim to safeguard investors and combat fraud. However, the impact of these regulations could be more far-reaching and, dare I say, detrimental than initially anticipated. While well-intentioned, the imposition of rigorous regulations may deter reputable companies from entering the market and quash the spirit of innovation that has driven the cryptocurrency industry thus far. Companies may opt to relocate to jurisdictions with more lenient regulatory environments without a coherent global regulatory framework. This, in turn, could lead to a dangerous exodus of capital and talent from South Korea, leaving it in the dust.

Therefore, policymakers must take a nuanced approach that balances investors’ protection with the encouragement of innovation. Perhaps, instead of going it alone, South Korea could spearhead a collaborative effort that brings together regulators from around the world to craft a regulatory framework that is both effective and equitable. By doing so, South Korea could become a beacon of progress in the cryptocurrency industry, fostering creativity and responsible business practices.

South Korea is still one of the biggest forces in the cryptocurrency space and will remain competitive for years to come if they strike a good balance.

Source: https://www.financemagnates.com/cryptocurrency/south-koreas-evolving-regulatory-landscape-for-cryptocurrencies-what-to-expect/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Regulating Cryptocurrencies

Regulating Cryptocurrencies

The International Monetary Fund (IMF) recently called for more regulation of cryptocurrencies, arguing that their rapid growth and potential impact on the global financial system make it imperative for governments to take action. While some may view this as an overreach of government authority, I believe that increased regulation is necessary to ensure the financial system’s stability and protect consumers.

The IMF’s concerns are not unfounded. Cryptocurrencies have grown tremendously in popularity over the past decade, with Bitcoin alone reaching a market capitalization of over $1 trillion at its peak. While some view cryptocurrencies as a way to decentralize financial systems and provide greater privacy, others have raised concerns about their potential for facilitating money laundering, terrorism financing, and other illicit activities.

Furthermore, the lack of regulation has contributed to the high volatility of cryptocurrencies, which can pose risks for both investors and the broader financial system. Cryptocurrencies are not backed by any government or financial institution, which means their value can fluctuate wildly based on market demand alone. This volatility makes cryptocurrencies a risky investment and can contribute to financial instability if large numbers of investors suddenly sell their holdings. In addition to these risks, there are concerns about cryptocurrencies’ environmental impact. The energy consumption required for mining cryptocurrencies is significant, and the carbon footprint of the industry is estimated to be comparable to that of a small country. As the world increasingly grapples with the urgent need to address climate change, the environmental impact of cryptocurrencies is becoming harder to ignore.

Given these concerns, it is clear that some level of regulation is necessary to address the risks associated with cryptocurrencies. However, it is important to note that not all regulation is created equal. Heavy-handed regulation that stifles innovation and drives the industry underground is not the answer. Instead, we need smart, targeted regulation that addresses the specific risks associated with cryptocurrencies while allowing for industry innovation and growth.

One potential area for regulation is anti-money laundering (AML) and counter-terrorism financing (CTF) laws. Currently, these laws are often not well-suited to the unique characteristics of cryptocurrencies, which can make it difficult to track and prevent illicit activities. By updating AML and CTF laws to better address the risks posed by cryptocurrencies, governments can help ensure that the industry is not used as a tool for illicit activities. Another area for regulation is investor protection. Cryptocurrencies are a new and complex asset class, and many investors may not fully understand the risks involved. By requiring greater disclosure and transparency from cryptocurrency exchanges and other market participants, governments can help ensure that investors have the information they need to make informed decisions.

Lastly, there is the issue of environmental impact. While regulating the energy consumption of the entire cryptocurrency industry may be challenging, governments could require greater transparency from cryptocurrency miners and exchanges about their energy usage and carbon footprint. This could help incentivize the industry to move towards more sustainable practices.

Of course, there are also risks associated with increased regulation. One concern is that heavy-handed regulation could stifle innovation and drive the industry underground, making it even harder to regulate and control. Additionally, there is a risk that poorly designed regulations could increase the risks associated with cryptocurrencies by driving them into unregulated or offshore markets. However, these risks can be mitigated through smart, targeted regulation that takes into account the unique characteristics of cryptocurrencies. By working closely with industry participants and other stakeholders, governments can develop regulations addressing the risks associated with cryptocurrencies while allowing for innovation and growth.

In conclusion, the IMF’s call for more regulation of cryptocurrencies is not an overreach of government authority but rather a necessary step to ensure the stability of the financial system and protect consumers. While there are certainly risks associated with increased regulation, these can be mitigated through smart, targeted regulation that addresses the specific risks posed by cryptocurrencies.

I believe that the increased regulation of cryptocurrencies is necessary to ensure the financial system’s stability and protect consumers, and can be achieved through collaboration between governments and industry participants.

 

Source: https://www.epw.in/journal/2023/9/letters/regulating-cryptocurrencies.html

VOLUME_LVIII_09_04032023

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Reimagining the Howey Test for the digital age of cryptocurrencies

Reimagining the Howey Test for the digital age of cryptocurrencies

In the case of the stablecoin, BUSD, which is issued by the cryptocurrency exchange, Binance. In February 2021, Binance was reportedly under investigation by the CFTC (Commodity Futures Trading Commission) to determine whether it had violated U.S. rules by allowing Americans to buy and sell derivatives that are linked to digital tokens. Shortly after, it was reported that the SEC was also investigating Binance, specifically with regard to the issuance of the BUSD stablecoin.

This conversation started again this week. According to a press release on Monday, Paxos, the issuer of the stablecoin Binance USD (BUSD), has acknowledged receiving a Wells Notice from the U.S. Securities and Exchange Commission (SEC), indicating a possible enforcement action. The SEC’s charge is that BUSD constitutes an unregistered security, despite Paxos claiming it is not. BUSD is a stablecoin pegged to the U.S. dollar, and Paxos has stated that it is always backed 1:1 with U.S. dollar-denominated reserves, held in segregated accounts, and bankruptcy remote. Paxos also emphasized that the Wells Notice only pertains to BUSD and not any other part of its business. It is mentioned that they are prepared to litigate if necessary. Paxos also announced earlier that it would stop issuing new BUSD tokens at the direction of the New York Department of Financial Services (NYDFS), which CoinDesk reported on. The NYDFS is currently investigating Paxos.

Stablecoins are a type of cryptocurrency that is designed to maintain a stable value relative to another asset, such as the U.S. dollar. They are often used to facilitate transactions on cryptocurrency exchanges or to provide a stable store of value for users of cryptocurrency wallets. In the case of BUSD, the SEC is reportedly investigating whether the stablecoin qualifies as a security under U.S. law. If the SEC determines that BUSD is a security, the issuer could be subject to regulatory requirements under federal securities laws.

The BUSD case highlights U.S. authorities’ continued regulatory scrutiny of the cryptocurrency industry, as well as the potential for stablecoins to be considered securities under the Howey test. I honestly think that BUSD is not a security. This should be a firm stand from all parties as nobody would expect a profit from having BUSD. I will walk you through my thoughts.

Howey Test in 1946

The Howey Test is a legal test used in the United States to determine whether a transaction qualifies as an “investment contract,” which is a type of security that is subject to regulation under federal securities laws. The test is named after the 1946 U.S. Supreme Court case SEC v. W.J. Howey Co., which established the framework for evaluating whether an investment contract exists.

Under the Howey Test, a transaction is considered an investment contract if it involves:

1. An investment of money

2. In a common enterprise

3. With an expectation of profits

4. That are derived solely from the efforts of others

If a transaction satisfies all four prongs of the Howey Test, it is considered an investment contract and subject to federal securities laws, including registration requirements and antifraud provisions.

It’s worth noting that the “common enterprise” prong of the Howey Test has been broadly interpreted by courts to include various arrangements, including cryptocurrency and other digital asset offerings. In recent years, the SEC has applied the Howey Test in several high-profile cases involving digital assets, including initial coin offerings (ICOs) and various types of token sales.

The Howey Test is an important tool for determining whether a transaction qualifies as a security and is used by regulators, investors, and businesses alike to navigate the complex and evolving world of securities laws.

Debate on cryptocurrencies are securities

The question of whether cryptocurrencies are securities under U.S. law has been a topic of much debate and uncertainty. The Securities and Exchange Commission (SEC) has taken the position that some cryptocurrencies may be considered securities if they meet the criteria established by the Howey Test.

In 2017, the SEC issued a report stating that the offering of certain cryptocurrencies and initial coin offerings (ICOs) may be subject to federal securities laws. The report emphasized that whether a particular investment transaction involves the offer or sale of a security depends on the facts and circumstances of that transaction, and the application of the Howey Test.

The SEC has also brought enforcement actions against certain cryptocurrencies and ICOs that it considers to be securities. Another example, in 2018, the SEC charged two cryptocurrency companies with conducting unregistered securities offerings. The companies had offered and sold digital tokens that were deemed to be securities because they met the Howey Test’s criteria.

Despite this, the application of the Howey Test to cryptocurrencies is still a matter of debate, with many in the cryptocurrency industry arguing that it is not applicable to digital assets. Some have argued that cryptocurrencies should be considered a new asset class that does not fit within the traditional definitions of securities, commodities, or currencies.

In response to the uncertainty, some countries have sought to establish clearer regulatory frameworks for cryptocurrencies. In 2019, the Swiss Financial Market Supervisory Authority (FINMA) published guidelines that outlined the regulatory framework for digital assets in Switzerland. The guidelines aimed to provide clarity on the classification and treatment of digital assets for financial institutions and other market participants in the country.

According to the FINMA guidelines, digital assets are divided into three categories: payment tokens, utility tokens, and asset tokens. Payment tokens are defined as digital assets that are primarily used as a means of payment, such as Bitcoin or Litecoin. Utility tokens, on the other hand, are digital assets that provide access to a specific product or service, such as a digital ticket or a token that grants access to a particular platform. Finally, asset tokens are digital assets that represent assets such as real estate, company shares, or other physical or financial assets.

Each of these three categories of digital assets is subject to different regulatory requirements in Switzerland. Payment tokens, for example, are not considered to be securities under Swiss law, and as such, they are not subject to the same regulatory requirements as securities. However, financial institutions that provide payment services with payment tokens must comply with the country’s anti-money laundering regulations.

Utility tokens are not considered to be securities if they meet certain conditions, such as being redeemable for services or products on a platform, but not tradable on secondary markets. If these conditions are not met, utility tokens may be considered securities and subject to Swiss securities regulations.

Asset tokens are generally considered to be securities under Swiss law, and as such, they are subject to the country’s securities regulations. This includes complying with rules around prospectus requirements, disclosure obligations, and registration with the authorities.

The guidelines provided by FINMA have helped to clarify the regulatory treatment of digital assets in Switzerland. By defining clear categories of digital assets and outlining the corresponding regulatory requirements, the guidelines have provided greater certainty and stability for market participants in the country’s digital asset industry.

Such clarify is essential. To me, the application of the Howey Test to cryptocurrencies is still a matter of debate, it is clear that the SEC has taken the position that some cryptocurrencies may be considered securities if they meet the criteria established by the Howey Test. As such, cryptocurrency issuers and investors must be aware of the potential implications of the Howey Test and ensure that their transactions are compliant with applicable securities laws.

Modern-day application of Howey Test on Cryptocurrencies

As the cryptocurrency industry has evolved, questions have arisen as to whether the Howey Test is still applicable in the modern-day context of cryptocurrencies. To address this issue, some experts have proposed a modern-day version of the Howey Test that takes into account the unique characteristics of digital assets.

The proposed modern-day version of the Howey Test for cryptocurrencies would include several factors. The first factor would be whether there is an investment of money. If a digital asset issuer has not sold any assets issued to build its project, it is unlikely to be considered a security.

The second factor would be whether there is an expectation of profits from the investment. If the digital asset is utility-based, such as being used for voting purposes, it is unlikely to be considered a security.

The third factor would be whether the investment of money is in a common enterprise. If the project is decentralized and not controlled and operated by a centralized entity, it is unlikely to be considered a security.

Finally, the fourth factor would be whether any profit comes from the efforts of a promoter or third party. If the profit primarily comes from the community, which has nothing to do with the issuance of the digital asset, it is unlikely to be considered a security.

Adapting Howey Test to better fit Cryptocurrencies

Adapting the Howey Test to fit the unique characteristics of cryptocurrencies better is a complex issue, and there is an ongoing debate among legal experts and regulators on how to do so. However, some potential ways to improve the test’s application to cryptocurrency include:

Examining the underlying technology: One potential approach is to look at the underlying technology of a cryptocurrency and evaluate whether it is sufficiently decentralized and functional to qualify as a utility token rather than a security. For example, suppose a token is used primarily to access a particular blockchain network or platform, and its value is tied to its utility rather than speculation. In that case, it may be less likely to be considered a security.

Considering the role of promoters and third parties: Another potential approach is to examine the extent to which promoters or third parties play a role in the development and promotion of a cryptocurrency. If a token’s value is primarily driven by the efforts of a centralized entity or individual, rather than the broader community of users, it may be more likely to be considered a security.

Focusing on the economic reality of the transaction: Rather than relying on a strict application of the four-pronged Howey Test, some legal experts have suggested that a more flexible approach may be needed to assess whether a particular cryptocurrency is a security. This could involve looking at the economic reality of the transaction and considering a range of factors, including the nature of the token, the purpose of the transaction, and the expectations of the parties involved.

In conclusion, while the Howey Test has been a useful reference point for determining whether an investment qualifies as a security, it is not a perfect fit for the unique characteristics of cryptocurrencies. Cryptocurrencies, especially those that are decentralized, often have features that do not align with traditional securities, and thus may not meet the criteria outlined in the Howey Test. As the cryptocurrency industry continues to evolve, there is a growing need for regulatory frameworks that are tailored specifically to the unique nature of digital assets. While the Howey Test can serve as a starting point, it is important to adapt and refine the rules to better reflect the realities of the cryptocurrency market. It is clear that cryptocurrency is a new and rapidly developing asset class that requires careful consideration when applying traditional securities laws. A more nuanced and flexible approach is needed to ensure that innovation is not stifled while at the same time protecting investors from fraudulent activities.

Coming back to my first point- BUSD is not a security. BUSD is primarily used as a means of payment, rather than as an investment vehicle, and it is not designed to generate profits for investors in the same way that traditional securities do. The price of BUSD is intended to be stable and is tied to the value of the US dollar, rather than being subject to the speculative forces that often drive the prices of other cryptocurrencies. Let’s stick to this.

 

Source: https://www.financialexpress.com/blockchain/reimagining-the-howey-test-for-the-digital-age-of-cryptocurrencies/2992092/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j