Virtual Currency – Korean Regulatory and Legislative Developments

Korean Virtual Currency
Market Overview

The proliferation of virtual currencies in South Korea has
resulted in a highly volatile environment for speculative and unregulated
trading on the Korean virtual currency exchanges. The Korean virtual currency
market remains desirable to issuers of initial coin offerings (“ICOs”), due in
large part to Korea’s advanced e-commerce, online banking and P2P
infrastructure being readily suited to the adaptation of blockchain
technologies.

In recent months, the Korean government has shown growing
interest in, and concern about, the widespread availability, sale and use of
virtual currencies in Korea, particularly with regards to the potential for
fraudulent or illegal activities, and the increasingly speculative nature of
the Korean virtual currency market. In response, several Korean regulatory
bodies including the Financial Services Commission (the “FSC”), the Financial
Supervisory Service (the “FSS”) have issued proposals, guidance and directives
in an attempt to formulate a regulatory response to the growing Korean virtual
currency market.

Financial Regulations

1. Current Status

   1. Korea's virtual currency
      exchanges

      The Korean government has yet to implement “know your customer”
      (“KYC”) or anti-money laundering (“AML”) regulations to govern the sale and use
      of virtual currencies in Korea. There are currently no regulations governing
      virtual currency exchanges in Korea, and for the time being, such exchanges do
      not need to be licensed or registered.

      Until such time as the compulsory KYC and AML regulations are
      implemented, the Korean government has issued recommendations to the commercial
      banks to strengthen their KYC and AML process relating to virtual currency
      transactions. Furthermore, the banking institutions with which the Korean
      virtual currency exchanges maintain accounts have been issued recommendations
      to confirm the adequacy of internal control systems of such virtual currency
      exchanges and ensure that such systems provide reliable information for KYC and
      AML purposes. The implementation of such recommendations is expected to occur
      by the end of 2017.

   2. Limitations on ICOs

      Public offerings of securities in Korea must comply with the
      regulations set forth in the Financial Investment Services and Capital Markets
      Act (the “FISCMA”), which may include the preparation and submission of a
      securities registration statement. In the context of an ICO or the sale of
      virtual currencies in Korea, careful consideration must be given to whether
      such virtual currencies constitute a “financial investment instrument” and a
      “security”, each as defined in the FISCMA. Issuers of virtual currencies must
      take care not to engage in any unauthorized public offering or solicitation
      activities in Korea absent a corresponding registration under the FISCMA.

      For your reference, the FSS and The Bank of Korea have issued
      guidance earlier this year strictly limiting the overseas remittance of fiat
      currency in relation to a purchase or sale of virtual currencies. Consequently,
      Korean residents intending to wire funds to an overseas issuer or seller of
      virtual currency in the context of an ICO or secondary trade of virtual
      currency will likely be unable to find a foreign exchange bank willing to
      process such wire transfers.

2. Pending Regulatory and
   Legislative Matters

   1. FSC proposals

      The FSC announced a plan to propose amendments to existing
      legislation that would impose KYC and AML requirements directly on Korean virtual
      currency service providers, including virtual currency exchanges. However, it
      is unclear whether and when such amendments will obtain the necessary approval
      of the Korean National Assembly.

      The FSC has also signaled its intention to enact new legislation
      that would impose certain obligations, such as adequate disclosure requirements
      and prohibition on virtual currency price manipulation, on virtual currency
      service providers including virtual currency exchanges.

      In the second half of 2017, it is expected that the FSC and the
      FSS will lead the adoption by Korea’s virtual currency exchanges of certain
      voluntary regulatory measures to provide greater investor protection and
      additional control and oversight of transactions involving virtual currencies.
      Examples of such measures include (i) segregation of customer funds from that
      of the exchange, (ii) system upgrades and improvements and (iii) enhanced
      security infrastructure including cryptographic key.

   2. Other legislative proposals

      Korean regulators are also considering a diverse range of other
      legislative proposals including a registration or license requirement for
      virtual currency exchanges and taxation of transactions involving virtual
      currencies. Currently, however, the regulators’ position appears to be to
      observe developments in other foreign jurisdictions prior to formulating any
      comprehensive regulatory regime for implementation in Korea.

      Criminal Regulations

      The use of virtual currencies to facilitate criminal activities,
      including for fraudulent purposes, may result in the imposition of criminal
      penalties ranging from imprisonment to monetary penalties. In anticipation of
      further regulation and legislation on virtual currencies in Korea, the scope of
      criminal violations and breadth of their enforcement may increase in the
      future.

      Concluding Remarks

      The Korean virtual currency market is expected to gradually
      mature over the next several months as Korean regulators grapple with the
      extent of regulations to impose. Despite the current unregulated nature of the
      market, any potential involvement with virtual currencies in Korea should be
      carefully devised and monitored in consideration of pending legislative and
      regulatory actions.

*This update is intended as
a summary news report only, and not as advice. For legal advice, please
inquire with your contact at Bae, Kim & Lee LLC, or the following authors
of this bulletin

Sky (Sih Kyoung) YANG