South Korea Implements Guidelines for Security Token Regulation

  • Adoption of Blockchain-based IDs Phasing Out Physical IDs
  • Security Token Regulation

South Korea’s Financial Services Commission (FSC) published new guidelines on Monday stating that FSC will regulate digital securities or blockchain-based tokenized assets according to the capital market rules.

The highly anticipated regulations are to institutionalize with the legislators of the country’s National assembly laying 17 different crypto-based legislative structures. These legislations commonly aim to make Digital Asset Basic Act (DABA) regulate Korea’s diverse crypto world.

The security tokens are regulated as securities if their characteristics align with the Capital Markets Act. Security tokens are digital assets that identify ownership, such as bonds, stocks, or real estate, under Capital Markets Act using distributed ledger technology.

Stablecoins, which are cryptocurrencies tied to the prices and value of other currencies such as the U.S. dollar and are used for exchange or payments, are not likely to be considered securities.

Some digital assets that do not have an issuer and do not satisfy the investor’s responsibilities are also not likely to be considered security tokens. According to the FSC, digital assets representing securities must be issued and distributed following the Capital Markets Act regulations.

The FSC will assess digital assets individually to determine if they possess characteristics similar to securities. The issuers and brokers, including cryptocurrency exchanges, must ensure evaluations comply with the regulations.

In addition, the regulations aim to establish an over-the-counter (OTC) market for these tokens by enabling entities to issue them directly, bypassing financial institutions. The FSC plans to propose the updates to current financial legislation and submit it by mid-2023.

Several South Korean companies such as the Korean Exchange, Kookmin and Shinhan banks, and Kiwoom Securities are eagerly preparing their digital asset platforms to handle or issue tokens in anticipation of new guidelines from the FSC, which they hope will allow them to offer such services.

Meanwhile, Busan aims to make Security Token Offerings a key part of its Digital Assets Exchange project, which has been developed in collaboration with leading international cryptocurrency exchanges.

Adoption of Blockchain-based IDs Phasing Out Physical IDs

South Korea plans to replace traditional physical ID cards with blockchain-based digital IDs by 2024. The digital IDs will be embedded in citizens’ smartphones through an identification app and are expected to have up to 45 million citizens registered within the first two years.

Although economist Hwang Seogwon sees potential benefits in finance, healthcare, taxes, transportation, e.t.c. he also warns of the need for a comprehensive risk assessment. Nevertheless, the new system is expected to bring economic benefits, including a $42 billion increase in economic value and a potential increase in domestic output by 13%.

The increase in economic value and domestic output can all be achieved by reducing payroll fraud, saving time on administrative work, expanding consumer credit, increasing trade, and creating new markets.

South Koreans are likely to embrace digital IDs with great enthusiasm, as they are known for their love of technology and its implications in everyday life, businesses, and government; this contrasts with the cautious approach in some countries.

For example, in 2020, South Korea introduced a blockchain-based driver’s license program, which over 5 million people adopted, and also the Korea Internet Security Agency started testing a similar system.

According to market research firm ReportLinker, this trend is expected to gain wider acceptance globally. As a result, the blockchain identity market is expected to grow by $3.58 billion by 2025, with a 71% compound annual growth rate.

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