In a significant move ahead of the implementation of the Virtual Asset User Protection Act in mid-July, the Financial Services Commission (FSC) of South Korea has announced new guidelines to determine whether Non-Fungible Tokens (NFTs) are considered virtual assets. The guidelines, revealed on June 10, aim to enhance predictability and ease the application of the new law.
The FSC noted that NFTs, which are unique digital tokens often used for collecting content like 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 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 interchangeable, unlike cryptocurrencies. The FSC will consider various factors, including the issuance and distribution structure and the service content, to determine the nature of NFTs. NFTs issued in large quantities, those that can be divided, or those used as direct or indirect payment methods may be classified as virtual assets. Conversely, 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 rather than their form or technology. For instance, the U.S. 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 the Financial Innovation Planning Division, addressed journalists on the morning on the same day, stating, “NFT transactions cannot be uniformly regulated as virtual assets, but occasional transactions will not be subject to such regulation.” This approach aims to avoid excessive regulation and align with the policy goal of promoting NFTs.
The FSC also outlined the responsibilities of businesses dealing with NFTs, requiring them to determine if their NFTs are virtual assets and comply with relevant laws. This measure is intended to ensure legal compliance and avoid criminal penalties. Future 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 assist businesses struggling with self-assessment, the FSC will allow inquiries to the financial authorities and plans to operate a related task force. This support aims to help businesses determine the virtual asset status of NFTs and navigate the regulatory landscape effectively.
“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 enhancing the predictability of the law and easing 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 ensures the security and authenticity of transactions. Virtual assets, including cryptocurrencies, are digital representations of value that can be traded or transferred electronically, and governments worldwide are increasingly focusing 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 Act 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 U.S., Japan, and Germany providing frameworks based on the use and characteristics of NFTs.
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