South Korea’s Financial Services Commission (FSC) is updating its approach to nonfungible tokens (NFTs), now classifying some of them as virtual assets. NFTs are unique assets that cannot be replicated, distinguishing them from cryptocurrencies. The FSC’s recent report stated that NFTs can now be classified as virtual assets if they are divisible, produced in masses, or used as a means of payment. Businesses issuing NFTs classified as virtual assets must report to the South Korean watchdog, ahead of the first crypto regulatory framework set to be implemented on July 19.
According to Jeon Yo-seop, the FSC’s Financial Innovation Planning head, NFT collections minted in large quantities are likely to be used as payment. For example, if one million NFTs were issued in a collection, they could be traded and used for transactions like cryptocurrencies. The FSC will not apply a single standard to classify NFTs as virtual assets but will review each case individually to make that determination. If an NFT exhibits traits of financial security outlined in South Korea’s Capital Markets Act, it may also be classified as a security.
Under the new guidelines, some NFTs may be eligible to earn interest when deposited in an exchange. The FSC issued a notice last year mandating that virtual assets deposited on crypto exchanges are eligible for interest generation. However, regular NFTs and central bank digital currencies (CBDCs) are excluded from this benefit. This new framework is part of South Korea’s Virtual Asset User Protection Act, aimed at criminalizing malpractices such as market manipulation and fraudulent transactions in the crypto space. The bill was passed in 2023 by the National Assembly, with a one-year grace period given to cryptocurrency-focused entities to comply with the regulations.
To enhance regulatory efforts, South Korean regulators have established a Joint Virtual Asset Crime Investigation Unit comprising 30 experts from seven national agencies. This unit seeks to combat crypto-related crimes and ensure compliance with the Virtual Asset User Protection Act. The evolving landscape of NFT regulation in South Korea reflects the government’s commitment to fostering a secure and transparent crypto ecosystem, with measures in place to protect investors and prevent illicit activities. By classifying certain NFTs as virtual assets and implementing new regulations, the FSC aims to bring greater clarity and oversight to the burgeoning NFT market.
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