By Chan Sik Ahn
It should not be too much of an exaggeration
to say that 2017 was the year of cryptocurrency, with Bitcoin leading the pack. The craze and hot debate on cryptocurrencies have continued this year.
As cryptocurrency trading overheated and Ponzi schemes and fraudulent deals involving cryptocurrencies occurred, Korean regulators declared in a series of press releases that they would ban all types of initial coin offerings (ICOs) and would tighten the regulatory grip on cryptocurrency trading in general.
In this vein, the Korean government has focused on cryptocurrency exchanges such Bithumb, Coinone, Korbit, Upbeat and others by introducing what is called the “real name verified cryptocurrency trading system.”
Recently, lawmakers from the ruling and opposition parties rushed to draft cryptocurrency-specific laws, stating that reasonable regulation is necessary rather than a complete ban. It is a good indication that the representatives of the people have started their own version of KYC, not short for the original and usual “Know Your Customers,” but “Know Your Cryptocurrencies,” in an effort to move in the direction of a rules-based approach, pulling away from the previous complete ban pursued by Korean regulators.
I think, however, that legislation regarding cryptocurrencies should be pursued prudently and step by step so various ― and sometimes conflicting ― interests and concerns among so many stakeholders and players in the crypto space may be well balanced. It is necessary to find a way to strike a golden balance between regulation and the promotion of the crypto-industry.
Let’s start by looking at the choice of terms for cryptocurrencies and their legal definition. In the space, terms like virtual currency, virtual money, digital currency, and cryptocurrency are being used. I think that “cryptocurrency” is the right term, considering its underlying technological nature, based as it is on blockchain or encryption technology.
The right definition of cryptocurrency in the law is crucial. We should find a legal definition that is basically technology-neutral and may cover not only existing tokens or coins like Bitcoin, Etherium and Ripple, but also new tokens or coins that will be generated by ICOs around the world and that may operate on different technology.
The good legal definition should be the one that is precise enough to give us a clear idea of what a cryptocurrency is while at the same time is flexible enough to incorporate developments coming our way. These two seemingly conflicting demands should be astutely harmonized in legally defining the cryptocurrency.
In addition, well-balanced regulation between the issuance market (primary market) and the distribution market (secondary market) would be necessary, just like a stock market. The two markets are closely related. It seems, however, that there is too much policy focus by Korean regulators on the secondary market, represented by cryptocurrency exchanges, and not enough attention on the primary market, represented by ICOs. It is true that because ICOs have various forms, content, venues and processes, and because coins or tokens emerging from ICOs have myriad characteristics and functionalities, it is quite challenging to provide specific parameters for ICOs in the legislation.
In my opinion, the law should only provide the bare minimum requirements for legitimate ICOs. If those requirements are met, then such ICOs should be legally permitted and the final call left to the market.
Regarding cryptocurrency exchanges, while investor protection measures are required, for instance, minimum levels of capital, security measures, prohibition of insider trading or price manipulation, it would also require policy consideration that such requirements should not act as another form of entry barrier to new start-ups with excellent technologies but little capital.
Given that many exchanges are hacked and millions of victims suffer, it should be considered that cryptocurrency exchanges are required by law to equip themselves with security systems to the level of banks and other financial institutions. Obligation on the exchanges to purchase insurance against hacking may also be introduced by law.
Cryptocurrency and blockchain technology are at the moment inseparable. On the other hand, cryptocurrency does not represent all aspects of blockchain technology. From a legal and practical point of view, it is not easy to address both cryptocurrency and blockchain technology at once in a single piece of legislation. I believe that, given these circumstances, a separate special law promoting blockchain technology would be wise.
To date, the only country we know that has a formal law specific to cryptocurrencies is Japan, which is now regulating the space with its amended Payment Services Act. It is interesting to learn that Gibraltar will soon write a law regulating ICOs specifically for the first time in the world. I hope Korea will be able to draft a model law regarding cryptocurrency and lead the crypto-world as a country where start-ups with innovative blockchain technology from around the globe wish to launch their ICOs and operate their cryptocurrency exchanges.
Chan Sik Ahn is a partner at HMP Law and head of the Tech & Comms practice group.