South Korea has rolled out a new law, compelling Non-fungible Token (NFT) issuers to register as virtual asset operators. This rule zeroes in on NFTs with distinct traits like wide-scale issuance, divisibility, and their role in transactions. Initially, NFTs weren’t labeled virtual assets per the Virtual Asset User Protection Act’s Enforcement Decree. But now, those with the specified attributes will be categorized as such.
Guidelines from the Financial Services Commission
On July 10, the Financial Services Commission released guidelines outlining the criteria for categorizing NFTs. NFTs acquired for content collection purposes will be exempted from the virtual asset classification. However, NFTs with unclear characteristics will undergo assessment, initially as securities and then as virtual assets.
In determining whether an NFT qualifies as a security, the FSC refers to the Token Securities Guidelines introduced by financial authorities in February of the previous year. If the acquired rights of an investor meet the criteria of securities under the Capital Markets Act, they will be subject to securities regulations, irrespective of the NFT’s technological or structural aspects.
Criteria for Virtual Asset Classification
For categorizing NFTs as virtual assets, the FSC takes into account various factors:
- Large-scale issuance or high fungibility.
- Divisibility, allowing the NFT to be fragmented into smaller units.
- Use as a direct or indirect mode of payment for goods or services.
- Exchange of virtual assets among unspecified individuals or payment for goods or services using other virtual assets.
Large-scale issuance refers to scenarios where numerous identical or similar NFTs are generated, making it challenging to distinguish their uniqueness, a defining characteristic of NFTs. Such NFTs, primarily intended for profit in the market, are classified as virtual assets. The FSC refrains from specifying a precise number to prevent regulatory exploitation.
Divisible NFTs, which can be divided into fractional units, lose their distinctiveness and are consequently subjected to virtual asset regulations. If an NFT is designed exclusively for exchanging it with another virtual asset, it falls under the virtual asset category. However, this excludes the purchase of NFTs with virtual assets on market platforms.
Reporting Obligations for Issuers
Under the new guidelines, entities involved in NFT transactions must determine whether their NFTs are virtual assets and report their operations as virtual asset businesses. This necessitates adherence to Article 2, Paragraph 1 of the Specific Financial Information Act, covering various activities such as sales, exchange, transfer, storage, and brokerage of NFTs.
Failure to comply with reporting requirements carries criminal penalties for virtual asset business operators. To assist businesses unsure about the virtual asset status of their NFTs, the FSC encourages them to seek clarification from the authorities. Jeon Yo-seop, head of the Financial Innovation Planning Division at the FSC, emphasized the commission’s readiness to provide assistance, stating, “If individual business owners find it challenging to determine independently, they can reach out to the Financial Services Commission. We will also offer examples of decisions for specific cases in the future.”
