South Korean Regulator Proposes Strict New Rules for Token Issuers

South Korea’s Financial Services Commission (FSC) has released a report outlining its new definition of cryptocurrencies, along with proposed procedures for token issuers and penalties for non-compliance.

These pending rules could impose onerous regulations on individuals or platforms that create NFTs for trading, as well as decentralized finance projects and more.

In a Nov. 23 report, the FSC detailed its proposed project in the Cryptocurrency User Protection Act, which has been brought before Congress for consideration.

It lays out rules for token issuers who want their tokens to be traded on South Korean exchanges, and proposes to penalize those who the FSC believes “gain undue profits by manipulating the market or trading with undisclosed information.”

The report begins with a discussion of the token offering business, which includes ICO operators, decentralized autonomous organizations (DAOs), and non-fungible token (NFT) minting services (and possibly others).

The FSC will require these entities to submit white papers, obtain favorable ratings from recognized token valuation services, obtain legal reviews of projects, and disclose regular business reports to users.

Previously, the FSC did not recognize NFTs as assets requiring regulation, but that decision was reversed earlier this week. It also considers privacy coins like Monero (XMR) and stablecoins like Tether (USDT) to be cryptocurrencies, while central bank digital currencies (CBDCs) are not.

Failure to follow the rules is punishable by at least 5 years in prison, plus 3 to 5 times the "unfair profits" received. Unfair profits will be considered any profit earned by the business without complying with the law. These penalties echo those in the current Capital Markets Act.

The Financial Supervisory Commission made the recommendations because it believed that the Special Reporting Act was insufficient in its ability to protect investors. The bill is the legislation that led to the closure of most cryptocurrency exchanges in South Korea due to strict requirements to continue operating.

A well-connected exchange insider told Cointelegraph that the proposals are positive:

"Once passed, the new law will further promote the development of the industry and help protect digital asset investors."