Virtual Currency – Korean Regulatory Flash Update
Korean Regulators Ban Initial Coin Offerings
On September 29, 2017, the Korean Financial Services Commission (the “FSC”) issued a statement declaring its intent to ban all future initial coin offerings (“ICOs”) in Korea. In its statement, the FSC expressed its concern over the increasing flows of currency in relation to virtual currency trading and the highly speculative nature of virtual currencies in general. The FSC is particularly concerned over the potential use of virtual currencies in furtherance of fraudulent or illegal activities, and intends to prevent any adverse impact from the sale and use of virtual currencies from “spilling over” into the traditional Korean currency and securities markets.
Impact on Issuers of ICOs
The Korean government has yet to implement any form of special regulatory scheme governing the issuance of virtual currencies in Korea. Previously, this meant that a potential issuer of an ICO into the Korean market had to carefully consider whether their proposed virtual currency (token) would constitute a “financial investment instrument” and a “security” under Korean law. Such potential issuers had to take care not to engage in any unauthorized public offering or solicitation activities in Korea absent a corresponding disclosure or registration under Korean law.
Following today’s announcement, the “financial investment instrument” and “security” analysis appears to be no longer relevant. In other words, regardless of what form a particular virtual currency may constitute, and whether or not such virtual currency is subject to Korean securities, banking or other law, any ICO of virtual currencies in Korea is restricted.
It is yet unclear what impact the FSC’s statement will have on the purchase and sale of tokens pursuant to an ICO conducted outside of Korea. However, our advice at this point is to cease any attempt to offer tokens to Korean residents for the time being.
Impact on the Existing Korean Virtual Currency Market
Regardless of the ban on the future ICOs, the government will strengthen criminal investigations and penalties for crimes related to virtual currencies. Existing virtual currency exchanges in the Korean market should anticipate strengthened requirements for data security, personal data protection, AML/KYC procedures and enhanced information disclosure.
