"US SEC Pushes for Crypto Asset Regulation... Korea Needs Reshoring"

Kim Jong-seung, CEO of MRI, speaks at the seminar titled 'US Crypto Asset Funding Policies and Legislative Challenges for Korea's Digital Assets' held at the National Assembly Hall in Yeouido, Seoul on the 22nd. Source: Park Sang-hyuk/Digital Asset

The U.S. Securities and Exchange Commission (SEC) is pushing for 'Regulation Crypto Assets,' which, if finalized, could shift the global crypto asset (digital asset) issuance market to the U.S., indicating that Korea also needs a reshoring policy.

Kim Jong-seung, CEO of MRI, stated at the seminar that "the U.S. is trying to attract issuance and business bases to its country through dedicated public offering regulations for digital assets," adding that "there is a possibility that technologies and capital from various countries, including Korea, will be absorbed into the U.S."

He further emphasized that "Korea must also improve its systems to allow digital asset companies to raise funds domestically and continue with distribution and verification," and that "a regulatory framework for digital asset reshoring policies should be considered."

Below is the full text of Kim's presentation.

Today, I will share insights on the crypto asset regulation titled 'Regulation Crypto Assets' announced by the SEC in August and briefly explain its impact on Korea's digital asset market.

This regulation was made public on August 18, and currently, there is a period for collecting opinions until October 20. Therefore, the crypto asset regulation proposed by the SEC is not the final version but an initial proposal, and the details are subject to change.

I will discuss this in six main parts. First, I will explain why this proposal has emerged; second, I will briefly outline the regulatory framework of the SEC. Following that, I will discuss the disclosure and termination design criteria contained in this regulatory framework, how the actual issuance and funding paths are carried out, and examine the potential impacts on the ecosystem. Finally, in the sixth part, I will address the implications for Korean companies.

First, I believe most of this can be explained with this slide. Essentially, it is a dedicated path for public fundraising that includes general investors for the first time in the U.S.

Until now, token issuance in the U.S. had to be conducted primarily through private placements targeting accredited investors, but this regulation introduces a new framework that allows general investors to participate.

There are specific registration exemption rules, namely Rule 200 and 300, and as you can see in the booklet, there are Rules 100 to 500. Rule 100 pertains to disclosures, Rule 200 is for startup-specific registration exemptions, Rule 300 covers funding registration exemptions, and Rule 400 outlines the termination criteria for investment contracts. The safe harbor conditions for investment contracts are specified, and Rule 500 includes conditions that can exclude the application of state securities laws when proceeding under this regulation.

In the current regulatory framework, the promises disclosed at the time of issuance serve as the basis for judgment when terminating the investment contract later, and compliance with disclosures and reporting becomes the trading conditions in the subsequent distribution process. Therefore, each of these is not an independent condition but rather a set of interrelated conditions. It would be beneficial to keep these three large components in mind as you review the content.

First, it is essential to understand the broader context and the issues that led to this proposal. As stated by SEC Chair Gary Gensler, due to existing regulatory difficulties in the U.S., some issuers have conducted crypto asset trading outside the U.S. or targeted only accredited investors within the U.S.

However, this creates problems. Due to high regulatory uncertainty, many U.S. companies have established entities outside the U.S., and U.S. investors have invested in tokens issued offshore. However, many of these offshore-issued tokens are from jurisdictions where U.S. investor protections do not apply.

Ironically, from the perspective of investor protection, allowing issuance within the U.S. is more meaningful for the U.S. itself. The previous policy of 'blocking to protect' has been discarded, and by allowing issuance and investment within the U.S. under clear disclosure conditions, a framework for protecting investors has been established.

Another significant aspect is that it can bring back U.S. companies that have gone overseas and attract various projects issued abroad back to the U.S. This is also described as part of a strategy to attract businesses to the U.S.

For example, Korean tech companies or those preparing tokens, which previously issued tokens in places like Singapore, Hong Kong, or the BVI, now have a pathway to issue directly in the U.S. Therefore, the impact on various countries is expected to be substantial.

First, it is necessary to examine how the SEC's regulatory framework has evolved. Since 2017, various cases have accumulated. Even in the absence of explicit regulations, it has shown how to regulate through various cases.

Officially, the principles for determining the applicability of securities laws to DAO tokens were established through the DAO report in 2017. Since then, the SEC's policies have continued to evolve through staff analyses, safe harbors, and working groups. These have been presented indirectly through individual commissioners' positions or staff reports rather than the official stance of the entire commission.

Then, in March of this year, the commission released an interpretive statement, which specifies the classification of digital asset types. Since it is an interpretive statement from the commission, it also has legal significance. The proposed Regulation Crypto Assets is also seen as an effort to establish regulations with legal binding force.

In the past, various regulatory policies were formed on a case-by-case basis without codified regulations, but the official codification began with the commission's interpretive statement and this Regulation Crypto Assets.

It is also necessary to consider the content announced last week. Currently, Regulation Crypto Assets pertains to non-security tokens. It does not cover regulations for security tokens or tokenized securities but focuses on the issuance of non-security tokens.

In contrast, last week, an innovation exemption was announced regarding the trading of tokenized listed stocks. The regulatory frameworks of the two systems are entirely different.

The first axis pertains to issuance. The content I am discussing today relates to cases where non-security crypto assets are issued in the form of investment contracts. The second axis pertains to trading, i.e., distribution.

The underlying legal provisions are also different. The content I will mainly address today is based on the exemption authority under securities laws, while the content announced last week regarding tokenized listed stocks pertains to securities trading laws.

Therefore, it is essential to understand these two separately. What we previously referred to as ICOs falls under the first axis, while the other side pertains to the recently popular stock tokens.

Of course, the regulations mentioned in the innovation exemption do not consider synthetic or derivative stock tokens that merely track an index. The actual stock tokens with legal rights are the ones subject to the innovation exemption.

Currently, many stock tokens accessed and traded through wallets are likely synthetic, and it is worth noting that such synthetic products are not subject to the relevant provisions.

Before delving into Regulation of Crypto Assets, it is necessary to examine the classification types of assets. In March of this year, the committee's interpretation document distinguished types of digital assets. These were categorized as digital goods, digital collectibles, digital tools, stablecoins, and digital securities, with Regulation of Crypto Assets focusing on non-security assets.

Therefore, digital securities and stablecoins mentioned at the end are not included. As will be elaborated in the second session, it is important to understand the distinction between the type of asset itself and the nature of the transaction.

Even if an asset is a non-security crypto asset, the manner in which it is sold may qualify it as an investment contract.

Investment contracts are judged based on the Howey Test. If there is an investment of money, a common enterprise is invested in, and profits are expected from the efforts of others, it can be classified as an investment contract, i.e., a security. This would then subject it to the applicable securities laws.

The interpretation document from March explicitly distinguished between the type of asset and the nature of the transaction, and it would be beneficial to think that this allows for the classification of various projects within the current crypto asset ecosystem.

Let’s clarify the scope addressed by Regulation of Crypto Assets.

The first case is when it qualifies as an investment contract. Crypto asset products that do not qualify as investment contracts are not addressed here. For example, Bitcoin is not the subject of the regulations we want to discuss today.

The second requirement is that the asset itself must be a non-security. The asset must be a non-security token, and security tokens are not regulated here.

The third requirement is that it must be a singular crypto asset. Designs linked to other rights are not included in the scope.

For cases like tokenized securities or contracts combined with other assets, it can be judged under existing securities laws.

Rule 100 includes disclosures and conditions for the termination of investment contracts. There are common rules mentioned here. Integrated judgments regarding relationships with other exemptions, inflation adjustments to issuance limits, specific disclosure requirements, and disqualifications are explicitly defined. Regardless of which of the two major issuance paths is used, these rules apply universally.

Rule 200, corresponding to Subpart B, is the startup registration exemption, and Rule 300, corresponding to Subpart C, is the fundraising registration exemption. There are differences in amounts and conditions, which I will discuss later.

Here, 'termination' refers to the end of the investment contract. As mentioned earlier, while the asset itself is a non-security token, it can be traded in the form of an investment contract. However, once the investment contract terminates at a specific point in time, it can then be freely circulated as a product.

If a project in the crypto asset ecosystem has the nature of an investment contract, knowing when that investment contract terminates is very important. Until now, there has been no clear standard for this.

However, the termination criteria for registration in Rule 400 apply not only to startup registration exemptions or fundraising registration exemptions issued under this regulation but also to projects that were previously issued.

Thus, the important point of Rule 400 is that it specifies criteria for releasing and terminating the application of investment contracts if conditions are met, regardless of the path of issuance.

Rule 500 discusses circulation. If issued under this regulation, state securities laws are excluded, and transactions in the circulation market also receive the same effect as long as the issuer continues to fulfill disclosure and reporting obligations.

Therefore, Rules 100, 200, 300, 400, and 500 form the backbone of Regulation of Crypto Assets.

There are detailed contents regarding disclosures or fundraising. The disclosure requirements are organized into ten items, with several additional requirements compared to existing securities disclosures.

In addition to business, finance, and governance, the disclosure targets include network structure, the infrastructure from which it is issued, tokenomics, and administrator authority. It can be seen that the disclosure requirements have advanced one step further to include contents suitable for the characteristics of crypto assets.

There are also requirements for the termination of investment contracts. The fulfillment of termination requirements will be judged based on the core management efforts promised at the time of issuance and the record of their implementation. The official issuance process and subsequent new promises will also serve as judgment criteria.

In my view, all rules from Rule 100 to 500 are important, but among them, the termination requirements for investment contracts could have a surprisingly significant impact on the crypto asset ecosystem.

What the issuer has indicated or promised regarding core management efforts related to the investment contract, whether the disclosed contents were actually adhered to, and whether there were subsequent related activities will serve as important criteria. This also applies to existing crypto assets that have been issued, separate from this issuance path. It would be good to refer to the detailed termination requirements in the materials.

What we are most interested in is issuance. There are two main paths for issuance.

One is the startup registration exemption specified in Rule 200, and the fundraising registration exemption in Rule 300 is further divided into Stage 1 and Stage 2.

First, the startup registration exemption allows for a cumulative amount of up to $5 million over four years. The fundraising registration exemption has a much larger scale. Stage 1 allows for up to $20 million over 12 months, and Stage 2 allows for up to $75 million over 12 months.

In addition to the funding limits, the number of uses is also specified. The startup registration exemption can only be used once. It is like a card that can only be used once.

On the other hand, the fundraising registration exemption is based on the cumulative total of the previous 12 months, so it can be continuously utilized, such as this year and next year. If conditions are well met, it may be possible to raise up to $75 million annually. Of course, whether doing so is ideal needs further examination.

There are several requirements here. One requirement is that the issuer must have a base in the United States, which is surprisingly important.

This requirement does not apply to the startup registration exemption. A company based in Korea can issue under the conditions of the U.S. startup registration exemption while conducting business in Korea.

In contrast, to utilize the fundraising registration exemption defined in Rule 300, the base must be moved to the United States. This point should also be noted.

The detailed contents of the startup registration exemption can be found in the materials. The fundraising registration exemption is naturally more stringent than the previously discussed startup registration exemption.

In summary, the United States promotes the issuance of digital assets and the attraction of business bases to the U.S. through dedicated public offering regulations for crypto assets. Once the regulations are finalized, the technologies and capital of companies from various countries, including Korea, may be absorbed into the U.S.

Korea must respond with a digital asset reshoring policy that organizes the procurement, circulation, and verification processes.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.