On June 10th, South Korea’s Financial Services Commission (FSC), the top financial regulator in the country, stated that certain non-fungible tokens will be excluded from the scope of the ‘Virtual Asset User Protection Act.’ The Act, which goes into effect July 19th, was enacted last year to protect users from fraud in the growing digital asset space.
According to the FSC, NFTs have a low likelihood of causing harm to users and thus can benefit from an approach of “regulatory innovation,” which is defined as experimenting with new paradigms while still protecting users and ensuring sustainable market growth.
The NFTs that will be excluded from the scope of the Act are those that are issued in limited quantities, primarily traded as collectibles, or serve other purposes than investment potential. Some examples of these types of NFTs include identity and ticket verification as well as those used in supply chain management.
However, the FSC noted that some NFTs may fall under the purview of the Act. These include those that are issued in large quantities, can be divided, or are used for direct or indirect payment methods. The agency declined to issue specific numbers or examples of these types to prevent NFT issuers from skirting around the law.
NFT Issuers Will Need to Complete a ‘Self-Assessment’
According to the FSC, issuers of non-fungible tokens will need to complete a “self-assessment” before offering their collections to their intended audiences. Still, it is allowing issuers to make inquiries to assess the legality of their NFT collection. The FSC will also form a Financial Task Force, presumably to enforce the legislation.
In a statement, the FSC said that the “legal nature of NFTs” will be judged on a “case-by-case basis” with an emphasis on the NFTs’ substance rather than name or technology. The agency will also consider all relevant factors in determining legality, including “issuance, distribution structure, terms and conditions, advertising” and other factors.
In this aspect, South Korea appears to be following in the footsteps of other countries in the regulation of NFTs. The U.S. Securities and Exchange Commission has had a similar approach to regulating NFTs, claiming that some collections can be construed as securities. Japan and Germany also have frameworks in place.
The Act was first enacted on July 18th, 2023, and comes as many countries are increasing regulation of virtual assets, including cryptocurrency and NFTs. The Web3 industry has scored two major wins this year with the approval of Bitcoin and Ethereum ETFs in the United States, but faces significant scrutiny over its commitment to privacy, which has become a sticking point in Europe.
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