Strategizing Digital Assets and Future Finance in the Republic of Korea

Discussions in the ROK have focused on regulating virtual asset businesses and preventing unfair trading to protect users. Since the 2017 "Emergency Measures on Virtual Currency," the Korean government has aimed to protect investors and curb issues arising from virtual asset trading driven by speculative demand. Despite these efforts, Bitcoin prices and trading volumes on Korean won-based exchanges (KWBE) have surged. On 11 March 2024, trading volume on five KWBEs reached KRW 18.1 trillion (over $13 billion), double that of the Korea Composite Stock Price Index (KOSPI) market. By June 2023, 6.06 million users were trading virtual assets, highlighting market growth. Consequently, the "Act on the Protection of Virtual Asset Users" (PVAU Act) was legislated in July 2023 and took effect on 19 July 2024, to regulate virtual asset businesses and protect users.

Major economies are integrating virtual assets into their regulatory frameworks, recognizing their potential to reshape finance systems. For example, the EU enacted the Markets in Crypto-Assets Regulation (MiCA) in 2023. The UK revised the Financial Services and Markets Act 2000 to include digital assets. Meanwhile, Hong Kong, China, Japan, and Singapore also amended their acts on payment, settlements, and securities to set up their regulatory framework for various types of digital assets. A joint seminar by the Organisation for Economic Co-operation and Development (OECD), Korea Financial Services Commission (FSC), and the Korea Institute of Finance (KIF) in March 2024 discussed ICO systems, stablecoins, and decentralized finance regulations. Despite these global advances, the ROK needs further discussion and a long-term master plan to foster digital asset industries and technologies.

The Korean government should permit domestic legitimate ICOs to attract global technology and foreign capital. This will also help induce the re-shoring of Korean firms expanding their businesses overseas. Currently, only Layer 1 coins and miscellaneous coins issued overseas are traded in the country. The merger of Finschia and Klaytn, which chose Abu Dhabi for their business, exemplifies the need for regulatory reform.

Figure 1: Proportion of Each Coins Traded in Exchanges

Note: Based on the Top 10 trading volumes in each market. The categorization of Layer 1 (BitCoin, Ethereum, etc.), stablecoins (USTD, BUSD, etc.), and the other coins are based on Coinranking.
Source: Korea Financial Services Commission (compiled from the H1 2023 Korean Financial Intelligence Unit survey results).

The government should also improve laws related to STOs and provide test beds for stablecoins to support traditional payment systems. Global financial companies are advancing in these areas, while the ROK lags due to regulatory uncertainties. Encouraging new and experimental digital asset initiatives will help integrate blockchain and distributed ledger technologies into finance systems.

Additionally, enhancing crypto literacy and applying differentiated regulations based on asset characteristics and investor types is crucial. Learning from other countries can guide the ROK in implementing flexible regulations. In Japan, for example, virtual currency exchanges must go through a screening process by the Japanese Virtual Currency Exchange Association (JVCES) and a review process by the Financial Services Agency (FSA) when listing a virtual asset. In Hong Kong, China, the Securities and Futures Commission (SFC) operates a preliminary screening process for listing virtual assets tradable by ordinary investors, while Singapore emphasizes that virtual assets are inadequate for general investors and strictly restricts virtual asset advertising. The UK included virtual assets in their Financial Services and Markets Act (FSMA) regulatory scope and allowed financial firms authorized by the Financial Conduct Authority (FCA) to deal with virtual assets for trading, brokerage, investment advisory, asset management, and other business activities. The Korean government must consider a flexible and gradual approach, rather than a uniform standard, in approving digital assets by considering factors such as the characteristics of each digital asset, their risk levels, and the scope of participants.

Regulating new financial tools and technologies is challenging. Governments should prioritize continuous regulatory improvement through collaboration among relevant companies, market participants, regulatory authorities, and other stakeholders.

The PVAU Act in ROK, a primary legislation, requires further refinement in aspects like issuance, trading, disclosure, and infrastructure. Initial implementation should focus on enforceable parts, gradually incorporating experience from unfair trade investigations. Establishing a sophisticated monitoring system, akin to the capital market, will be a long-term endeavor due to the complexity and costs^[1] involved.

^[1] The capital market regulation model, upon which the PVAU Act is based, is funded through several fees and charges. These include issuance fees for issuers, supervision fees for financial investment firms acting as intermediaries, fees paid by trading parties to relevant agencies, and membership fees necessary for self-regulatory body operations.

Klaytn. 2024. Klaytn and Finschia Merge Proposal Passes, Creating Asia’s Largest Blockchain Ecosystem. 15 Feb.

Korea Law Translation Center. Act on the Protection of Virtua Asset Users.

Korea Institute of Finance.    

Reuters. 2017. S.Korea to Hold Emergency Meeting on Cryptocurrencies, Measures Expected Friday. 13 December.