South Korea’s Financial Services Commission (FSC), the country’s top financial regulator, has released new guidelines clarifying when non-fungible tokens (NFTs) are considered virtual assets. These guidelines aim to protect users and minimize the risk of widespread harm, and they will be part of the Virtual Asset User Protection Act, which takes effect on July 19, 2024.
New NFT Classification Guidelines
On Monday, the FSC detailed the conditions under which NFTs are classified as virtual assets. The regulator explained that NFTs are generally issued in limited quantities and are primarily traded for collecting content like videos and images. Because they are held by a small number of individuals and have restricted secondary market transactions, the FSC views the risk of widespread user harm as minimal, differentiating NFTs from other virtual assets.
Characteristics of NFTs Excluded from Virtual Asset Classification
According to the FSC, NFTs are excluded from being classified as virtual assets under the Enforcement Decree if they meet the following criteria:
- Intended for Collection: NFTs that are mainly for collecting purposes.
- Facilitate Transactions Between Parties: NFTs that facilitate specific transactions between users.
- Unique and Irreplaceable: NFTs that are unique and cannot be replaced by another token.
Examples include proof of authenticity tokens in the art market, property transaction records, and supply chain verification tokens. However, the FSC noted that if an NFT functions effectively as a virtual asset, the provisions of the Virtual Asset User Protection Act and other relevant regulations will apply.
Implementation and Key Measures
The Virtual Asset User Protection Act, enacted on July 18, 2023, will become effective on July 19, 2024. The act aims to safeguard virtual asset users and establish market order. Key measures include:
- Defining Virtual Assets: Clarifying what constitutes a virtual asset.
- Safe Storage Requirements: Mandating the secure storage of users’ deposits and virtual assets.
- Penalties for Unfair Trading: Imposing penalties for unfair trading practices.
The enforcement decree provides further details, including exclusions from the virtual asset category, management of user deposits, mandatory use of cold wallets for asset storage, and insurance or reserve requirements for incident liability.
Case-by-Case Legal Classification
The FSC emphasized that the legal classification of NFTs must be judged on a case-by-case basis. This assessment should consider the substance rather than the name or technology. Factors to evaluate include:
- Issuance and Distribution Structure
- Terms and Conditions
- Advertising
- Business and Service Contents
Individuals and entities intending to issue, distribute, or handle NFTs should thoroughly evaluate these factors to determine the appropriate legal classification.
