"A Separate System for Issuance and Disclosure of Digital Assets is Necessary for the Development of the Domestic Industry"

Han Seo-hee, a lawyer at the law firm Kim & Chang, speaks at a seminar titled 'U.S. Cryptocurrency Fundraising Policies and Legislative Challenges for Korea's Digital Assets' held on the 22nd at the National Assembly Hall in Yeouido, Seoul. Source=Park Sang-hyuk/Digital Asset

There is an opinion that a separate issuance and disclosure system, distinct from securities, should be established to foster the domestic virtual asset (digital asset) industry.

Han Seo-hee, a lawyer at Kim & Chang, stated at the seminar that "as time goes on, the influence of issuers of digital assets diminishes, and factors such as tokenomics, protocols, and on-chain data become crucial for investment decisions, making the existing securities disclosure system insufficient."

He emphasized the need to introduce exemptions for small public offerings like in other countries and to consider not only issuance disclosures but also hard forks, protocol upgrades, hacking incidents, and large transfers of related wallets as subjects for regular disclosure.

He also explained that it is necessary to allow domestic issuance and to revise regulations on corporate accounts, trading support, and disclosures to ensure that the capital and industrial benefits generated in the domestic market do not solely benefit overseas issuers.

Below is the full text of the lawyer's presentation.

I would like to share my thoughts on how the regulatory systems of our country and the United States differ, why a unique issuance and disclosure system for digital assets is necessary in our country, and what direction we should take in the future.

As you may know, there has been much discussion about the legal and systematic classification of digital assets for the past 3 to 4 years.

In the United States, digital assets can be classified as a type of investment contract security. In that case, there is a concept of investment contract securities in our Capital Markets Act, and there has been much discussion about whether digital assets, or so-called virtual assets, fall under the concept of investment contract securities in the Capital Markets Act.

As you may know, this discussion has been somewhat clarified now. Unlike the United States, it has been effectively determined in our country that pure digital assets themselves are not securities under the Capital Markets Act.

The reason for this can be understood by comparing the Howey Test in the U.S. with the classification system of our Capital Markets Act.

In our country, it is based on the premise that contractual rights are indicated, and the right to profit distribution belongs to the investor. In contrast, in the U.S., the expectation of profit alone can meet certain requirements, and it is not necessarily required to have an explicit profit claim right.

Therefore, based on the interpretation of regulations, it has been effectively organized that digital assets without a profit claim right do not fall under the category of securities in our country.

There have been several discussions related to this, and I believe you have encountered related content through guidelines for fractional investments and so on.

In the United States, the 'expectation of profit' can include the expectation of capital gains, meaning that the value of the asset will increase.

For example, consider digital assets like Bitcoin, Ethereum, Ripple, and Solana. When someone invests simply expecting price increases without a separate profit claim right, whether this constitutes a security has been an important issue.

In the U.S., it has been interpreted that it could be classified as a security depending on the interpretation and the method of sale.

On the other hand, in our country, as mentioned earlier, it has been judged that in the absence of such contractual rights, it does not ultimately constitute a security.

As a result, under the interpretation that the nature of digital assets is clearly separated from securities, questions have arisen about how the issuance and disclosure of digital assets should be conducted and how to introduce a regulatory framework for future issuance in a situation where issuance is currently not permitted.

This part can be seen as still being in a state of vacancy.

The ongoing discussions have ultimately led to the conclusion that digital assets, which have characteristics different from securities or existing capital market products, need a unique issuance and disclosure system.

So, let’s specifically summarize how the characteristics of securities and digital assets differ.

In the U.S. regulations, looking at the CLARITY Act and others, there are provisions that allow for the transition from being classified as a security to a product after a certain point, introducing concepts like decentralization and 'mature blockchain'.

The reason is that when digital assets are first issued, the role of the issuer is very important, but as time passes and blockchain technology develops, the roles of various participants become significant.

As the number of validators increases and the diversity of their geographical distribution and other factors increases, the degree of decentralization also rises.

For example, a digital asset with nodes concentrated in one region can be considered less mature and decentralized than a digital asset with nodes distributed globally.

As this happens, the influence of a specific issuer or issuing entity gradually weakens.

Ultimately, the concept of 'issuer' is important initially, but over time, the role of the issuer diminishes, creating a mismatch with the current disclosure system, which is based on the existence of the issuer and the business form or profit generation of the issuing entity.

Secondly, there is a significant difference in the nature of the information itself.

In existing securities, the business plans or financial conditions of the issuer are important. Of course, in digital assets, the issuing entity or financial condition is not entirely meaningless, but what investors consider important during the actual investment process is whether the tokenomics is designed to function properly, how the distribution plan is established, and whether the protocol technology is actually implementable and functioning normally.

This is true not only in our country but also globally, where these factors are evaluated significantly for digital assets that rank high in market capitalization, often leading to price increases.

Therefore, elements that were not considered special information in the existing securities market can become very important information in the digital asset market.

Currently, there is a need to provide information that cannot be encompassed by the securities disclosure system as important information to investors. This is why a unique issuance and disclosure system for digital assets is necessary.

Another characteristic is that digital assets issued overseas can also circulate domestically, and digital assets issued domestically can also circulate overseas. In other words, there are almost no regional limitations.

Securities are fundamentally regulated based on the law of the place of issuance.

The issuance and circulation are regulated according to the laws of the respective country based on the place of issuance. As you know, even if a domestic company wants to issue an ADR, it must go through a very complicated process.

Without going through such procedures, global circulation of securities is not easy.

On the other hand, digital assets have relatively low regulatory barriers. If the issuance regulations in our country are strict, they can be issued overseas, and digital assets issued overseas can circulate domestically as they are.

Therefore, if the issuance regulatory system of one country does not align with the global regulatory environment, regulatory gaps may occur solely based on that country's regulatory system.

The difference is that a regulatory system that differs from overseas can have a much greater impact on the domestic market than on existing securities.

Considering these points, it can be said that the current global market has a regulatory framework for issuance that has been significantly organized.

In the EU, the MiCA regulation currently in effect operates a white paper-centered issuance disclosure system.

Since issuance is permitted, there is naturally an issuance disclosure system, and it is operated by having the issuer prepare a white paper and submit it to the competent authority, then publicly disclose it on the issuer's website and so on.

In South Korea, similar to the responsibility for false disclosures in issuance announcements, the MiCA regulation also holds issuers liable for damages if important information in the white paper is inadequately disclosed.

Additionally, a system has been established to exempt small public offerings from regulations, similar to what was previously announced. For example, if the total amount raised is less than €1 million over a 12-month period, or if offers are made to fewer than 150 individuals per member state, these exemptions apply. The criteria for amount and number of investors are set independently, meaning both conditions do not need to be met simultaneously.

€1 million is approximately 1.5 billion Korean won. Thus, there is a system that exempts regulations within certain limits.

The United States, as previously detailed, has a regulatory framework that seems more complex than that of any other country. While the existing regulatory system for securities may theoretically apply, it is often not practically enforced, and there are numerous institutional attempts to exclude certain cases from this framework, resulting in a very complex structure.

Although not yet passed, the Clarity Act attempts to allow digital assets, which may initially be classified as securities, to gradually transition into commodities. Once classified as commodities, the regulatory requirements related to issuance and disclosure obligations significantly decrease.

Moreover, as previously explained, there are provisions to exempt or relax disclosure obligations for small public offerings and fundraising. In particular, discussions are underway to apply relaxed disclosure obligations for fundraising up to a cumulative limit of $75 million over 12 months.

Issuance announcements must include unique elements of digital assets such as distribution plans for tokens, source code, transaction history, supply volume, and consensus mechanisms.

For ongoing disclosure obligations, the principle is to focus on semi-annual reports, but if recognized as a mature blockchain, there are discussions about exempting ongoing or ad-hoc disclosure obligations.

Of course, the Clarity Act has not yet been passed, but it is understood that attempts to include such exemption clauses are ongoing.

The previously mentioned Regulation Crypto Assets is similar. There are two methods: startup exemptions and fundraising exemptions, which have been discussed as strategies to encourage onshoring of businesses in the U.S.

In the U.S., startup exemptions and fundraising exemptions can be utilized, and it is important to note that in certain cases, establishing a corporation in the U.S. and having management or business ties to the U.S. is required.

Japan also does not prohibit ICOs. Japan has been developing regulations for crypto assets primarily under the Payment Services Act and has also been refining systems under the Financial Instruments and Exchange Act that governs financial products.

In practice, Japan views crypto assets as a product within the financial market, allowing financial companies to handle crypto assets, and the relevant licensing requirements have been established. Therefore, issuance is naturally permitted.

Japan has not prohibited ICOs from the beginning. There have been cases where initial sales were conducted through IEOs on exchanges. For example, the Coincheck exchange sold Palette Tokens, raising approximately 1 billion yen.

Subsequently, startups have utilized IEOs, and legal grounds have been established for venture capital to invest in tokens issued by startups. Thus, it can be understood that Japan takes a much more positive stance on the issuance of digital assets compared to South Korea.

Now, let’s examine what implications can be drawn from these cases for establishing our regulatory framework. Ultimately, while this area has been somewhat organized, there is a need to create a regulatory framework for digital assets through a separate classification system distinct from securities.

In particular, I believe there is a need to reflect the uniqueness of digital assets more in relation to disclosures and issuance. As seen in overseas cases, a broad definition of certain exemptions is characteristic.

If South Korea allows the issuance of digital assets in the future, I believe it is necessary to reference these aspects. For instance, there may be a need to add a system for exemptions for small public offerings targeted at startups.

Especially regarding disclosures, while existing ad-hoc disclosures were centered around financial statements, digital assets require consideration of not only financial statements but also blockchain and on-chain data.

In issuance announcements, it may be worth considering adding information about the distribution structure of tokens, rights and functions indicated by the tokens, and protocol technology.

Ad-hoc disclosures are also widely included in the global market, and on-chain events such as hard forks, protocol upgrades, hacking incident histories, and large movements from related wallets should be important subjects for ad-hoc disclosures in the market.

If a different method is introduced in the disclosure system, it may be necessary to reference a type of self-certification method used by the SEC. However, fully adopting this could lead to unclear accountability, making it difficult to apply the SEC's approach directly to South Korea.

Nonetheless, it is worth considering that countries like the U.S. are attempting such methods to foster the industry. In particular, it is noteworthy that global markets are making attempts to allow issuance without prior review of all issuance cases, and then addressing potential issues through disclosure systems and regulations against unfair trading.

Since South Korea currently does not allow issuance, it is necessary to prepare for the onshoring strategies that other countries are adopting. If issuance cannot occur in South Korea and must happen overseas, costs for establishing local corporations and opening corporate accounts will arise.

Additionally, securing legal opinions and utilizing local accounting and tax services will incur significant costs. Conversely, if these tasks can be performed in South Korea, not only will the domestic industry develop, but the issuance-related costs for businesses may also decrease.

However, to ensure that such businesses can operate actively in South Korea, it is necessary to standardize and clarify procedures for regulatory frameworks, issuance notifications, and responses.

In particular, since there are currently various restrictions on the use of corporate accounts related to virtual assets in South Korea, it is essential to establish a structure that allows issuance businesses to smoothly use corporate accounts at Korean won exchanges or virtual asset exchanges for fund management after issuance.

Therefore, the digital asset issuance system should also be examined in conjunction with the corporate account issue. Currently, the trading support and disclosure systems are not clearly established in law. While they are largely operated under a self-regulatory approach, for the clarity of the regulatory framework, these aspects should also be explicitly included in the law.

Finally, I would like to mention one last point. The digital asset market has seen numerous successes and failures, with significant investments made, and in the process, investor damages have repeatedly occurred. This is not just a problem unique to South Korea but has been a continuous occurrence in global markets as well.

Nevertheless, there are now global projects like Ethereum and Solana. In contrast, many digital assets or layer 1 projects issued in South Korea have stagnated or disappeared.

I would like to emphasize the need for South Korea to properly organize its issuance-related regulations so that domestic funds can be utilized as funding channels for domestic businesses. In particular, South Korea has a highly developed distribution market centered around exchanges. The distribution market operates smoothly, and the industry has developed to a considerable scale.

Despite the development of the distribution market, the domestic issuance market has hardly benefited, resulting in a significant portion of the advantages being attributed to overseas issuers.

Therefore, I believe it is necessary to consider a regulatory framework that allows domestic capital to return to domestic industries when a basic law for digital assets is established in the future.

I hope that the restructuring of the issuance system will lead to the nurturing of domestic businesses and that these aspects will be well reflected.

I hope that the issuance system related to digital assets is organized, and that the connection between continuous disclosures and occasional disclosures in issuance announcements will lead to the revitalization of a healthy distribution market, thereby developing the digital asset ecosystem in a way that it can recover.

I believe that this ecosystem can be made more complete by designing the system well from the issuance stage.

When establishing the basic law for digital assets in the future, I hope that we can think more deeply about the unique issuance and disclosure system of digital assets, and that this will ultimately lead to the development of our country's digital asset industry.

This concludes my presentation. Thank you.