South Korea's top financial regulator has issued guidelines clarifying when non-fungible tokens (NFTs) are considered virtual assets. This distinction aims to minimize the risk of widespread user harm. The guidelines will be part of the Virtual Asset User Protection Act, effective July 19, 2024.
South Korea's Financial Services Commission (FSC), the country's top financial watchdog, has rolled out new guidelines that define when NFTs will be registered as virtual properties. The new move has been made to prepare for the "Virtual Asset User Protection Act," which is going to be enforced on July 19, 2024.
The FSC notes that NFTs, created in small numbers and primarily used for collecting videos and images, pose little risk to users. Usually held by a small number of users, they also see little trading volume. Accordingly, these NFTs are not considered a major threat by the FSC and are thus treated differently from other virtual assets.
The new rules come under the Enforcement Decree, which stipulates details about the "Virtual Asset User Protection Act." This law was newly established on July 18, 2023, and will take effect from July 19, 2024. It is aimed at protect users of virtual assets and securing order in the market.
Definition of what constitutes a virtual asset. Definition of safe storage of users' deposits and virtual assets. Penalties for unfair virtual asset trading acts.
The decree also stipulates what is excluded from belonging to a virtual asset category, defines the way in which deposits by users need to be managed, and makes it mandatory to use cold wallets for asset storage. Further, it requires insurance or reserves to cover liability in case of incidents.
FSC emphasized that the legal treatment of NFTs should be determined by each case. Case-by-case judgement should be based on the actual substance of NFTs, not the name or technology, it said. It announced that various factors, such as issuance and distribution of NFTs, terms and conditions of NFTs, advertising, and type of business or service, need scrutiny.
NFT businesses should refer to this guideline to determine if their business belongs to the virtual asset business. If NFT businesses fall under the aforementioned guideline standards, they will be subject to the "Specific Financial Information Act," which governs the selling, trading, transferring, and storing of virtual assets, digitally known as the virtual asset virtual asset broker. Criminal charges will be filed if businesses do not report as the aforementioned virtual asset business.
The FSC has announced that it will actively support businesses that are undecided or in a grey area about the classification of their NFTs. They will provide case decision letters and examples to help businesses clearly understand and follow the newly established laws.
In a nutshell, South Korea's FSC has given specific criteria on when NFTs are regarded as virtual assets for the protection of users and the order of the market. As the "Act on the Protection of Users of Virtual Assets" is to be implemented, it requires businesses to accurately appraise their NFTs to conform properly to the new rules.
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