This country-specific Q&A provides an overview of Blockchain laws and regulations applicable in South Korea.
Please provide a high-level overview of the blockchain market in your jurisdiction. In what business or public sectors are you seeing blockchain or other distributed ledger technologies being adopted? What are the key applications of these technologies in your jurisdiction?
In the public sector, the Ministry of Science and ICT (“MSIT”) has allocated the budget of KRW 53.1 billion for 2021 (a 55% increase from that of the previous year), for promotion of various blockchain projects, such as promotion projects to introduce blockchain technology to the social welfare, voting, new and renewable energy, and donation sectors and also to support blockchain companies in general, and pilot projects to assess whether introduction of blockchain technology would be effective in certain industries and to develop the decentralized identifier technology.
The Bank of Korea (“BOK”), the central bank of Korea, is also reviewing the introduction of the central-bank digital currency (“CBDC”). Recently, the BOK engaged Ground X, the operator of the blockchain platform called Klaytn, via a public bid process, to establish a trial environment based on the distributed ledger technology in cooperation with the BOK and test whether development, issuance and redemption of CBDC would be feasible.
In the private sector, the business expansion utilizing the blockchain technology has been prevalent. For example, the largest online messaging application in Korea launched a mobile digital art platform and marketplace integrated with its digital asset wallet in July 2021 whereby non-fungible tokens (“NFT”) would be traded. Some of the major travel and leisure agencies have adopted a single blockchain-based reward system.
To what extent are tokens and virtual assets in use in your jurisdiction? Please mention any notable success stories or failures of applications of these technologies.
Tokens and virtual assets are primarily used for payment, utility, and investment in Korea. Major players have already launched projects to adopt tokens/virtual assets for their payment and utility systems. For example, Korea’s largest online messaging application introduced its own utility token for use on its blockchain platform. The NFT market has also expanded particularly in the art industry, including via numerous digital art market platform.
To what extent has blockchain technology intersected with ESG (Environment, Social and Governance) outcomes or objectives in your jurisdiction?
We understand that there are cases where, for example, a blockchain-based shareholder identity verification process has been adopted to encourage active participation by minority shareholders and a blockchain-based ledger for donation has been implemented to mitigate the risk of misappropriation.
Has COVID-19 provoked any novel applications of blockchain technologies in your jurisdiction?
In June 2020, the Korean government introduced a QR code-based electronic entry log system (“KI-Pass”) to take preventive measure against COVID-19. KI-Pass records the entry when a facility operator directly scans the QR code from the mobile device of the individual entering the facility. The blockchain-based digital COVID-19 vaccine certificate system was also introduced in April 2021. The certificate only records a public key used for confirming the vaccination status of the holder on the digital certificate issued by the relevant agency, limiting the potential risk of infringing the individual’s privacy.
Please outline the principal legislation and the regulators most relevant to the use of blockchain technologies in your jurisdiction. In particular, is there any blockchain-specific legislation or are there any blockchain-specific regulatory frameworks in your jurisdiction, either now or envisaged in the short or mid-term?
There is no existing blockchain-specific legislation or regulatory framework in Korea. The Korean regulatory authorities have not provided clear insight on the classification of cryptocurrencies under Korean law. Through a ruling on May 30, 2018 that cryptocurrencies can be confiscated as criminal proceeds, the Supreme Court of Korea recognized cryptocurrency as legal property but such ruling was too narrow in scope to clarify how cryptocurrencies would be classified in any subsequent cryptocurrency laws or regulations in Korea. We understand that there are discussions among the regulators to classify and regulate cryptocurrencies. According to various news articles, the Financial Services Commission (“FSC”) is currently assessing whether certain coins may be deemed as “security tokens” and thus become subject to the securities law of Korea, the Financial Investment Services and Capital Markets Act (“FSCMA”).
The government is largely concerned with the protection of investors and consumers of cryptocurrency. It has shown particular concern regarding cryptocurrency-related illegal activities, such as multilevel schemes and money laundering. Accordingly, the amended Act on Reporting and Use of Certain Financial Transaction Information (“AML Act”) has become effective as of March 25, 2021 to impose anti-money laundering obligations, including the requirement to file and obtain approval for its business with the regulatory agency in charge, on virtual asset service providers (each a “VASP”). Numerous VASPs completed their filings as required under the AML Act in September 2021. (Please refer to our response to No.10 below for more details.)
Whereas, through a ruling on May 30, 2018 that cryptocurrencies can be confiscated as criminal proceeds, the Supreme Court of Korea recognized cryptocurrency as legal property. The Supreme Court ruling are both too narrow in scope to clarify how cryptocurrencies will be classified in any subsequent cryptocurrency laws or regulations in Korea. There are multiple pending bills before the National Assembly seeking to regulate the use of blockchain technologies and virtual assets. Most are focused on implementing measures to protect virtual asset investors while some consider fostering the development of blockchain technology in general.
What is the current attitude of the government and of regulators to the use of blockchain technology in your jurisdiction?
The Korean government views blockchain technology as part of its key economic policy goals for the 4th Industrial Revolution and is active to support the private sector’s development and integration of blockchain technology. For instance, the Korean government has adopted the blockchain-based mobile identification system in 2021 whereby the public officials would use their mobile apps for identity verification when entering the government buildings.
On the other hand, the Korean government is seeking to closely regulate investment of virtual assets. As noted above, the FSC is reviewing how to classify and whether to apply the FSCMA to security tokens.
Are there any governmental or regulatory initiatives designed to facilitate or encourage the development and use of blockchain technology (for example, a regulatory sandbox)?
The Special Act on Financial Innovation Support (the “Special Act”), effective as of April 1, 2019, introduced Korea’s “regulatory sandbox” policy for the financial sector. Under the Special Act, companies selected by the FSC are exempted from current financial regulations for two years to test new technologies outside the complex regulatory environment. The new law has introduced expedited confirmation on regulation and relaxed regulatory standards for those financial services designated as ‘innovative financial service’ by the government. Out of the companies currently in the regulatory sandbox, we understand that several companies are blockchain-focused.
Busan, the first city to be designated as a blockchain regulation-free zone in Korea, also actively supports the development and use of blockchain technology in various areas (e.g., development of a smart cold chain platform and public safety video reporting services).
As noted above, the BOK is reviewing the potential introduction of CBDC.
Have there been any recent governmental or regulatory reviews or consultations concerning blockchain technology in your jurisdiction and, if so, what are the key takeaways from these?
Major government institutions, including the FSC, the Ministry of Justice, MSIT and the Office for Government Policy Coordination, convened a meeting in May 2020 to discuss blockchain technology and virtual asset investment.
The key agreements from the meeting were that the FSC would lead the initiative to supervise VASPs and develop a regulatory framework for virtual asset investment while the MSIT would be responsible for promotion and development of blockchain technology and the relevant industries.
Has any official guidance concerning the use of blockchain technology been published in your jurisdiction?
There has been no official guidance from the Korean regulatory authorities on the general use of blockchain technology. The official guidelines from the authorities are limited in scope to cryptocurrency and anti-money laundering.
The MSIT, together with the National Intelligence Service, National Security Research Institute, and Telecommunications Technology Association, has published the official guidelines for blockchain encryption technology.
What is the current approach in your jurisdiction to the treatment of cryptocurrencies for the purposes of financial regulation, anti-money laundering and taxation? In particular, are cryptocurrencies characterised as a currency?
Korean regulators tend to apply existing relevant Korean laws such as the FSCMA and the Criminal Act to cryptocurrency-related transactions. As noted above, the FSC is currently reviewing how to classify and whether to apply the FSCMA to security tokens. The FSCMA defines securities as “financial investment products for which investors do not owe any obligation to pay anything in addition to the money or any other valuables paid at the time of acquiring such instruments.” Securities are categorized into six classes under the FSCMA: (1) debt securities, (2) equity securities, (3) beneficiary certificates, (4) investment contract, (5) derivatives-linked securities, and (6) depositary receipts. Cryptocurrency could likely fall under the FSCMA’s definition of debt security, equity security or investment contract depending on the specific facts and circumstances involved.
As of March 25, 2021, the amended AML Act has become effective, imposing anti-money laundering requirements for cryptocurrency exchanges and other VASPs. The AML Act has modified the definition of a “virtual asset” and clarified the start date for the record retention period for virtual asset transaction records. As with other financial companies, VASPs are subject to various AML requirements, including suspicious transaction report, currency transaction report, and customer due diligence. VASPs are also required to set up in good faith an internal control system to fulfil such AML requirements and to separately manage transaction details of its customers. Moreover, VASPs must file VASP reports to the Financial Intelligence Unit (“FIU”) after satisfying prescribed requirements (including certified information security management system (“ISMS”), and engagement in financial transactions with a bank deposit account which confirms the identity of the account holder in case engaging in fiat transactions), and the FIU may refuse to accept such VASP reports if there are grounds for non-acceptance. The six-month grace period for existing VASPs to file a VASP report expired in September 2021 and numerous major VASPs completed their filings.
Financial institutions doing business with virtual currency exchanges and/or custodial wallet providers are subject to the FIU’s Anti-Money Laundering Guidelines for Cryptocurrency published in January 30, 2018 (the “AML Guidelines”). The notable requirements under the AML Guidelines include the following: (i) real-name verification for fiat withdrawal from and deposits to cryptocurrency exchanges, (ii) customer due
diligence to check the identity of users, maintenance of a separate transaction record for each user, and compliance with cryptocurrency-related policies, and (iii) monitoring and reporting suspicious transactions. The financial regulators may issue correction orders or business suspension orders pursuant to the AML Act if a financial institution violates a provision of the AML Guidelines.
The bill to partially amend the Income Tax Law to impose tax on income generated from transfer or lending of virtual assets was promulgated on December 29, 2020. The amended Income Tax Law stipulates that the income generated from transferring or lending virtual assets after January 1, 2022 must be reported when filing for income taxation. The net profit generated from the transfer or lending of virtual assets will be categorized as an “Other Income” item and separately imposed a 20% tax.
Are there any prohibitions on the use or trading of cryptocurrencies in your jurisdiction?
In January 2018, the FSC banned foreigners and minors from cryptocurrency trading to prevent loss by participating in virtual currency investments that have massive fluctuations. Moreover, cryptocurrency trading through anonymous virtual bank accounts has been banned as the name on the trader’s bank deposit account must match the account name at cryptocurrency exchanges.
Meanwhile, the amended AML Act stipulates that when Korean Won is traded with virtual assets, a bank deposit account that allows the confirmation of the identity of the account holder must be used. Please also note that VASPs seeking to facilitate fiat transactions should procure such account (i.e., account that verifies the account holder’s real name) to file their VASP reports to the FIU.
To what extent have initial coin offerings taken place in your jurisdiction and what has been the attitude of relevant authorities to ICOs?
On September 29, 2017, the FSC issued a press release banning any type of ICOs in Korea, including those taking the form of securities. The FSCMA acts to directly prohibit an ICO if the offered coins are classified as “securities” under the FSCMA. Under the FSCMA, an offer or sale of securities (tokens) to 50 or more non-accredited investors would be regarded as a public offering and be subject to the FSCMA’s offering restrictions. If a token is classified as a “security”, the issuer must file a securities registration statement for the tokens to be offered in Korea with the FSC. If the offered coins are not classified as “securities” under the FSCMA there are technically no specific legal grounds that would prohibit the ICO, but there is a strong possibility (as evidenced by the September 29, 2017 FSC press release) that Korean regulators would challenge the legality of the ICO.
If they are permissible in your jurisdiction, what are the key requirements that an entity would need to comply with when launching an ICO?
Is cryptocurrency trading common in your jurisdiction? And what is the attitude of mainstream financial institutions to cryptocurrency trading in your jurisdiction?
Korea is one of the global leaders of cryptocurrency trading in terms of volume and has one of the highest penetration of cryptocurrency ownership by its residents. In May 2021, Korea was estimated to be the third largest market for cryptocurrency trading after China and the United States.
There is a number of leading cryptocurrency exchanges operating in Korea that allow consumers to exchange cryptocurrency with fiat currency or other cryptocurrencies. However, fiat-to-crypto transactions, or vice versa, are only offered at certain major exchanges that completed their VASP filing in partnership with banks providing real-name-verified bank accounts. Other exchanges without such bank partnership offer only crypto-to-crypto trading.
The attitude of mainstream financial institutions to cryptocurrency trading is unclear. They generally appear to be taking extra caution in getting involved with cryptocurrency exchanges as many refused to provide real-name verification services during the VASP reporting process. That said, we understand that some have also made investments in certain VASPs.
Are there any relevant regulatory restrictions or initiatives concerning tokens and virtual assets other than cryptocurrencies (e.g. trading of tangible property represented by cryptographic tokens)?
There are no rules that are directly applicable to tokens and virtual assets other than cryptocurrencies, such as NFT. However, the financial regulatory authorities indicated that existing laws and regulations such as the FSCMA can be applied depending on the nature of the concerned tokens and virtual assets.
Are there any legal or regulatory issues concerning the transfer of title to or the granting of security over tokens and virtual assets?
There are multiple issues concerning the transfer of title or granting of security as the law does not define at which point the transfer is made. In general, control over the tokens/virtual assets (i.e., holding private keys to the tokens/virtual assets) is considered as having ownership over the tokens/virtual assets. However, there are instances were tokens/virtual assets are controlled by multiple parties. In such cases, it is uncertain how the law will define ownership in relation to the transfer of title. This area of security tokens of title and assets, however, has been a growing industry in Korea as new token products are being developed.
How are smart contracts characterised within your legal framework? Are there any enforceability issues specific to the operation of smart contracts which do not arise in the case of traditional legal contracts?
Korean law generally does not require a particular form/structure in contract formation as long as there is an offer and acceptance between the parties. As such, a Korean contract
does not have to be recorded in writing to be enforceable. Enforceability issues with smart contracts may arise, however, depending on how information is encoded in smart contracts. Since smart contracts are comprised of programmed codes that usually cannot be easily understood by a lay person, the issue of whether there was a valid offer and acceptance between the parties is likely to arise. Moreover, there is no case precedent where a record of smart contract in a blockchain network has been admitted as evidence in Korean legal proceedings.
To what extent are smart contracts in use in your jurisdiction? Please mention any key initiatives concerning the use of smart contracts in your jurisdiction, including any examples relating to decentralised finance protocols.
The Institute of Information & Communications Technology Planning & Evaluation (“IITP”) has announced its projects on development of smart contracts, vulnerability test in the process of developing, distributing and implementing smart contracts, development of smart contract platforms, development of formal specification technology for smart contracts, development of technology for protecting personal information included in smart contracts, and reliability tests. However, we understand that their projects are in the early stage. To our knowledge, there has been no specific project using smart contracts led by the government. We are unaware of any initiatives in the decentralized finance sector.
Have there been any governmental or regulatory enforcement actions concerning blockchain in your jurisdiction?
The Korean government actively investigates cryptocurrency-related fraud and criminal acts. Criminal penalties have been imposed on multilevel fraud schemes, investment fraud related to cryptocurrency mining, and concealment of criminal proceeds through money laundering under the Criminal Act, which governs criminal fraud, and the Civil Act, which governs civil fraud. We have seen the regulators conduct on-site investigations and/or searches and seizures.
For example, there have been criminal cases regarding business activities of major cryptocurrency exchanges. The trial courts have rendered decisions on a case-by-case basis as some cases were found guilty while others were not. Furthermore, there are also ongoing dispute regarding the grounds for tax assessment on virtual assets and initial coin offerings.
Has there been any judicial consideration of blockchain concepts or smart contracting in your jurisdiction?
There has been no judicial consideration of blockchain or smart contracts, but the Korea Information Society Development Institute released a report entitled “Research on the Application of Smart Contracts to the Public Sector” (the “Smart Contract Research”) with a focus on blockchain technology and smart contracts. The Smart Contract Research compares smart contracts to traditional contracts under the Korean Civil Act and calls for the need to update the regulatory framework to accommodate smart
contracts. Discussions around whether smart contracts may be regulated per traditional contract laws are active in the academia.
Are there any other generally-applicable laws or regulations that may present issues for the use of blockchain technology (such as privacy and data protection law or insolvency law)?
Due to blockchain technology’s decentralized handling of data, it is unclear how Korea’s existing data and privacy laws will address specific uses of blockchain technology in Korea with personal information.
Under Korea’s Personal Information Protection Act (“PIPA”), personal information is defined as information pertaining to a living individual (e.g., name, address and images) that can be used to identify that individual either on its own or when easily combined with other information. All forms of data that fall under this definition, including those on the blockchain, are covered by the PIPA regardless of the format (e.g., encrypted, pseudonomized, etc.).
As such, the data stored on blockchains and its participants would be subject to compliance with the PIPA. In respect of any personal information being processed in the blockchains, the participants in the blockchain could be characterised as data controllers and data processors under the PIPA. Also, if an entity/person receives, process, stores, or transfers any personal information to a third party, the PIPA will require that such a person first seek and obtain consent from data subject. As blockchain technologies require all data to be spread across and stored in multiple locations, any new participant to a blockchain would be granted with access to all data previously stored in the blockchain, which might include personal information. In such a case, sharing personal information with a new participant to the blockchain could trigger the abovementioned consent requirement under the PIPA.
Are there any other key issues concerning blockchain technology in your jurisdiction that legal practitioners should be aware of?
Although there are no explicit border restrictions or obligations to declare cryptocurrency holdings, the Foreign Exchange Transaction Act (“FETA”) and the Foreign Exchange Transactions Regulations (“FETR”) regulate the remittance of funds out of Korea to overseas accounts for fiat currencies. The FETA prescribes certain procedures and documents for each type of transaction listed in the FETA for both the remitter of funds and the banks handling the remittance. Each type of transaction has different procedures and requirements to remit funds overseas. Neither the FETA nor the FETR have guidelines regarding cryptocurrencies, but in practice Korean banks generally decline to process foreign exchange transactions related to cryptocurrency trading, even if the amount of such transactions is below the monetary limits that would trigger the reporting requirements under the FETA.
Estimated word count: 3636
Privacy & Cookies Policy