Popularity of Virtual Currencies
Virtual currency is the newest hot issue among investors. It is now generating profit far exceeding the profit levels of stocks or bonds. The most famous of virtual currencies, Bitcoin, jumped from KRW 300,000 to approximately KRW 3 million in two years, whereas Ethereum went up from KRW 10,000 at the beginning of this year to approximately KRW 200,000 at present. Virtual currency deals involve such players as an exchanger, user, and miner. Below we look at the Korean legal regulations that are relevant to these players.
What is Virtual Currency
Bitcoin, the most famous of virtual currencies, was devised by Satoshi Nakamoto, a then-unknown programmer. As bitcoin is run by decentralized networks without a central control tower that issues and maintains the currency, but rather by blocks that are chained together to arrange deals – hence, the term “block chain”.
State Regulations on Virtual Currencies
The position taken by various states regarding virtual currencies can be one of allowance, disallowance, or deferral. In this regard (i) states that allow virtual currencies include the U.S., Germany, U.K, and Japan, (ii) some states such as China and Russia do not even permit the exchange of virtual currencies, and (iii) meanwhile, Korea is one of the states that has not yet determined whether to allow or disallow virtual currencies.
Current Korean Regulations on Exchange of Virtual Currencies
The exchange of virtual currencies means the exchange of virtual currencies that are already in circulation. As there is no law in Korea that prohibits the exchange of virtual currencies, such exchange is not illegal, so long as it does not conflict with existing laws.
To be more specific, the operator of a virtual currencies exchange market needs to register as stipulated by the Act on the Consumer Protection in Electronic Commerce. In this regard, while the exchange of virtual currencies by users is not prohibited, the remittance of money abroad for purposes of purchasing virtual currencies is not allowed under the Foreign Exchange Transactions Act. Bithumb and Coinone are examples of virtual currencies exchange markets in Korea.
Current Korean Regulations on Issuance of Virtual Currencies
The ‘issuance of virtual currencies’ means to issue new forms of virtual currencies to attract investment. Unlike exchanges of virtual currencies, the issuance of virtual currencies (under an Initial Coin Offering, or ICO) is not an area of active discussion. In May 2017, BOScoin of Korea raised approximately KRW 13.6 billion (USD 12 million) through an ICO in only 17 hours. As such, the importance of ICOs is expected to increase in the future.
The issuance of virtual currencies is similar to an IPO (Initial Public Offering) in that virtual currencies are openly sold to the public. However, since an ICO is largely different from an IPO as it does not involve the receipt of stocks or securities, the general view in light of the current legal regime is that regulations regarding public offerings under the Financial Investment Services and Capital Markets Act do not apply to ICOs. Nevertheless, “the business of receiving any investment under an agreement to pay an amount exceeding such investment in the future” may be subject to punishment under the Act on Regulation of Conducting Fundraising Business Without Permission.
Prospects of Future Regulation on Virtual Currencies
According to media reports, Bithumb, one of the well-known Korean virtual currencies exchange markets, accounts for 12% of the entire world market. The Korean Financial Services Commission created a task force for the regulation of virtual currency, but it has yet to decide on whether to regulate the same, and if so, the degree of regulation. Although it is difficult to predict the course of future regulations, in view of the reality that virtual currencies are already being actively exchanged as well as the importance of Fintech, full disallowance like in the case of China does not seem to be feasible. Thus, it is important to monitor the trends signaled by regulating authorities, particularly keeping in mind such matters as (i) whether virtual currencies constitute “a means of electronic payment” under the Electronic Financial Transactions Act, and (ii) whether virtual currency issuing procedures are regulated under the Capital Markets Act.
HMP Law – Tech & Comms Team
Chan Sik Ahn / Garam Shon