Korea FSC: Transaction of virtual assets by corporate entities to be allowed in stages

The Financial Services Commission (FSC) of Korea has embarked on a carefully calibrated and phased approach to allow corporate entities to participate in the virtual asset market. This represents a significant shift from the previous stance, which largely prohibited such transactions. The FSC's current position is driven by a confluence of factors: evolving global trends in virtual asset regulation, the increasing utilization of blockchain technology, and a recognition of the potential benefits of controlled corporate participation in the domestic market. However, the FSC remains deeply cognizant of the risks associated with virtual assets, particularly concerning money laundering, market volatility, and investor protection. Therefore, the roadmap is characterized by a gradual, staged implementation, with robust safeguards and monitoring mechanisms at each phase.

Background and Rationale for the Shift

Prior to this new roadmap, corporate transactions of virtual assets in Korea were effectively banned following government regulations introduced in 2017. This prohibition was rooted in concerns that, compared to individual transactions, corporate involvement could pose significantly greater threats of money laundering and contribute to market overheating, potentially leading to speculative bubbles. The government's decision to ban these transactions was intended to stabilize a highly volatile market. Banks, as a routine practice, restricted the opening of real-name verified accounts for corporations intending to engage in virtual asset transactions, effectively cutting off corporate access to the market.

However, several key developments have prompted the FSC to reconsider this restrictive approach. First, the implementation of the Virtual Asset User Protection Act on July 19, 2024, established a crucial legislative foundation for protecting users of virtual assets. This act provides a framework for addressing issues like deposit protection and unfair trading practices, creating a more secure environment for all market participants.

Second, there has been a noticeable shift in the global regulatory landscape. Major countries around the world have begun to accept corporate transactions of virtual assets, recognizing their potential role in fostering innovation and economic growth. The FSC acknowledges this trend and understands that maintaining a complete ban could lead to domestic businesses falling behind in the rapidly evolving blockchain and virtual asset sectors.

Third, domestic businesses have expressed a growing demand for participation in the virtual asset market. This demand stems from the increasing use of blockchain technology in various industries and the desire to explore new business opportunities related to virtual assets. Companies are seeking to leverage blockchain for innovative services, including the issuance of Non-Fungible Tokens (NFTs), the establishment of mainnets, and the development of virtual asset wallets and security solutions. Restricting corporate access to virtual assets was seen as hindering these endeavors and potentially leading to a loss of talent and capital to other jurisdictions.

The Phased Roadmap

The FSC's roadmap is designed to allow corporate participation in stages, with each stage introducing progressively broader access and accompanied by corresponding safeguards. The overarching principle is to prioritize user protection and market stability while gradually fostering a more inclusive and dynamic virtual asset ecosystem.

Phase 1: Transactions for Liquidation Purposes (H1 2025)

The initial phase, to be implemented in the first half of 2025, focuses on permitting corporate entities to open real-name verified accounts solely for the purpose of selling virtual assets and liquidating them into cash. This limited access is granted to specific categories of entities:

1. Law Enforcement Agencies: Agencies like the Prosecutors' Office, National Tax Service, and Korea Customs Service, which have the legal authority to confiscate criminal proceeds, were already granted access to real-name accounts prior to the formal announcement of the roadmap. This allows them to manage and liquidate seized virtual assets effectively.
2. Non-Profit Corporations and Universities: These entities, including designated donation organizations, are permitted to open accounts in the second quarter of 2025. The rationale is that these organizations often receive donations and contributions in the form of virtual assets and require a mechanism to convert them into cash to fund their operations. However, the FSC recognizes that many non-profits lack the internal infrastructure to handle virtual assets safely. Therefore, a task force of related organizations is planned to provide support in establishing minimum internal control standards. This includes guidelines for accepting, managing, and liquidating virtual assets, addressing concerns about transparency and potential misuse.
3. Virtual Asset Exchange Service Providers: Exchanges are allowed to use the fees they receive in virtual assets, liquidate them into cash, and utilize the proceeds for their operating expenses. This addresses a practical need for exchanges, which often receive a portion of their revenue in virtual assets. However, to mitigate the potential for conflicts of interest arising from large-scale sell-offs by exchanges (which could negatively impact users), this permission is granted gradually. Exchanges are required to jointly develop guidelines for handling the sale of virtual assets, ensuring transparency and minimizing market disruption.

Phase 2: Pilot Test for Investment and Financial Purposes (H2 2025)

The second phase, scheduled for the second half of 2025, marks a significant expansion by allowing certain types of institutional investors to engage in virtual asset transactions for investment and financial purposes. This phase is designed as a pilot test, limited to Qualified Professional Investors.

A total of 3,500 corporate entities, including listed companies and registered corporations classified as qualified professional investors under the Financial Investment Services and Capital Markets Act (FSCMA), are eligible to participate. These entities are already permitted to invest in highly risky and volatile derivatives products, demonstrating a higher risk appetite and experience in managing complex financial instruments. The FSCMA defines qualified professional investors as corporations with 10 Billion KRW or more (5 Billion if subject to external audit) in financial investment products. Financial companies, are explicitly excluded from this pilot test. The rationale is to avoid potential risk contagion to the broader financial system.

The FSC emphasizes that the aim of these transactions should be restricted to investment and financial purposes. This suggests a focus on long-term holdings and strategic investments rather than short-term speculative trading.

Furthermore, the FSC plans to implement additional safeguard measures during this pilot phase. These include:

• Transaction Guidelines: Banks will receive guidelines to strengthen their verification of the purpose of transactions and the origin of funds. This is crucial for preventing money laundering and ensuring that corporate activities align with the permitted investment and financial purposes.
• Third-Party Custody: Virtual asset exchanges will be encouraged to utilize third-party custody and management services. This adds an extra layer of security and reduces the risk of internal fraud or mismanagement of assets.
• Expanded Information Disclosures: Increased transparency for investors is a key priority. The FSC will require expanded information disclosures to ensure that investors are fully aware of the risks associated with virtual assets and the activities of the participating corporate entities.
• Bank and Exchange Screening: Even within the group of qualified professional investors, individual investment capacities may vary. Therefore, the ultimate decision to issue a real-name verified account rests with the banks and virtual asset exchanges, which are expected to conduct thorough screening processes.

Phase 3: Consideration for Broader Corporate Participation

The roadmap does not provide a specific timeline for allowing broader corporate participation, including ordinary corporations not classified as qualified professional investors. This decision is contingent on several factors:

• Evaluation of the Pilot Test: The FSC will thoroughly review the outcomes of the pilot test in Phase 2, assessing its impact on market stability, user protection, and the overall virtual asset ecosystem.
• Second Phase Legislation: The successful implementation of the second phase legislation on virtual assets is crucial. This legislation will address issues such as business entry requirements, operational regulations, transaction rules (including issuance and disclosure), and the establishment of self-regulatory bodies.
• Regulatory Reforms: Further regulatory reforms related to foreign exchange and taxation systems are necessary to accommodate broader corporate participation. These reforms will address cross-border transactions, tax implications, and other legal and regulatory considerations.

The FSC's cautious approach to expanding access beyond qualified professional investors reflects a commitment to avoiding the risks that led to the initial ban in 2017. The gradual, phased approach allows for continuous monitoring and adjustments based on real-world experience.

Specific Considerations for Financial Companies

The roadmap explicitly addresses the participation of financial companies. While the pilot test in Phase 2 excludes them, the FSC recognizes the potential role of financial institutions in the virtual asset market. However, the committee recommends a cautious approach due to the potential for risk contagion to the wider financial system.

Instead of directly permitting financial companies to trade virtual assets, the FSC intends to support their involvement through alternative avenues:

• Security Token Offerings (STOs): The FSC will actively promote legislation on STOs, which are digitalized forms of securities that utilize distributed ledger technology. STOs provide a regulated framework for issuing and trading tokenized assets, potentially opening up new investment opportunities for financial companies in the blockchain space.
• Investment in Blockchain Companies: The FSC will encourage financial companies to invest in blockchain-related businesses. This indirect participation allows financial institutions to benefit from the growth of the blockchain sector without directly engaging in virtual asset trading.

The FSC is actively participating in parliamentary discussions regarding legislative revisions related to STOs. The goal is to establish a legal framework that allows for the independent issuance of security tokens without requiring a securities company as an intermediary. This is expected to streamline the process and reduce costs, making STOs a more attractive option for both issuers and investors.

Improvements to Listing Guidelines

Beyond the phased roadmap for corporate participation, the FSC is also addressing concerns related to the listing of virtual assets on exchanges. Recent volatility in virtual asset prices immediately after listing, and excessive competition among exchange service providers for exclusive listings, have raised concerns about inadequate screening processes.

To address these issues, the virtual asset committee has recommended strengthening the best practice guidelines for listing virtual assets, introduced under the Virtual Asset User Protection Act. The key objectives are:

• Bolstering Pre-Listing Screening: Enhancing the screening process before a virtual asset is listed is crucial. This includes securing a minimum level of circulation, strengthening the listing criteria, and documenting the deliberation process to ensure thoroughness and credibility. The aim is to prevent the listing of assets solely based on prevailing trends without adequate due diligence.
• Preventing Excessive Post-Listing Volatility: By strengthening the pre-listing process, the FSC aims to reduce the extreme price fluctuations often observed immediately after a new virtual asset is listed. This protects investors from potentially manipulative practices and contributes to a more stable market.
• Promoting Self-Regulation: The FSC emphasizes the importance of self-regulatory efforts by the industry. Exchange service providers are encouraged to actively participate in upgrading the best practice guidelines and adhering to them, thereby improving the overall integrity of the listing process.

The FSC's position on institutional trading of crypto in Korea is one of cautious but progressive liberalization. The phased roadmap reflects a deep understanding of both the potential benefits and the inherent risks of virtual assets. By prioritizing user protection, market stability, and a gradual, data-driven approach, the FSC aims to foster a responsible and innovative virtual asset ecosystem in Korea, aligning with global trends while mitigating the potential for negative consequences. The emphasis on collaboration with industry stakeholders, the development of robust guidelines, and the continuous monitoring of market developments demonstrate the FSC's commitment to a balanced and sustainable approach to integrating corporate entities into the virtual asset market.