Navigating the NFT Landscape: South Korea’s Regulatory Framework

The Financial Services Commission (FSC) of South Korea has delineated new parameters for non-fungible tokens (NFTs), exempting certain categories from the ambit of virtual asset regulations. This policy clarification is a strategic move to mitigate potential risks to consumers while fostering a secure digital asset marketplace.

FSC’s NFT Classification Guidelines: On a recent Monday, the FSC promulgated comprehensive guidelines to demarcate when NFTs should be regarded as virtual assets. The FSC’s criteria stipulate that NFTs, often limited in issuance and traded for collectible content like videos and images, are not typically prone to mass-market transactions. This unique trait significantly reduces the likelihood of widespread consumer detriment, thereby categorizing NFTs separately from other virtual assets.

Per the FSC’s directive, NFTs that serve primarily as collectibles, facilitate peer-to-peer transactions, or are singular and non-replicable, are not classified as virtual assets under the Enforcement Decree. This includes NFTs used as art authenticity proofs, real estate transaction ledgers, and supply chain authentication tokens. Conversely, NFTs that operate analogously to virtual assets will be subject to the “Virtual Asset User Protection Act” and corresponding regulations.

Virtual Asset User Protection Act: The FSC has enacted the Enforcement Decree to elucidate the provisions of the Virtual Asset User Protection Act, ratified on July 18, 2023, and slated for implementation on July 19, 2024. The act’s primary objectives are to protect virtual asset users and to instill a sense of order within the market. It encompasses defining virtual assets, mandating secure storage for user deposits and assets, and penalizing unfair trade practices. The decree further specifies exclusions from the virtual asset classification, user deposit management protocols, obligatory cold wallet usage for asset safeguarding, and insurance or reserve mandates for incident accountability.

Case-by-Case Legal Classification: The FSC underscores the necessity of a case-specific approach to NFT classification, prioritizing the essence over the nomenclature or underlying technology. Issuance modalities, distribution frameworks, contractual terms, promotional strategies, and the nature of business and services are critical factors for entities considering the issuance, distribution, or management of NFTs.

Source: https://www.fsc.go.kr/no010101/81214