Korean Virtual Currency

Market Overview

The proliferation of virtual currencies in South Korea has

resulted in a highly volatile environment for speculative and unregulated

trading on the Korean virtual currency exchanges. The Korean virtual currency

market remains desirable to issuers of initial coin offerings (“ICOs”), due in

large part to Korea’s advanced e-commerce, online banking and P2P

infrastructure being readily suited to the adaptation of blockchain

technologies.

In recent months, the Korean government has shown growing

interest in, and concern about, the widespread availability, sale and use of

virtual currencies in Korea, particularly with regards to the potential for

fraudulent or illegal activities, and the increasingly speculative nature of

the Korean virtual currency market. In response, several Korean regulatory

bodies including the Financial Services Commission (the “FSC”), the Financial

Supervisory Service (the “FSS”) have issued proposals, guidance and directives

in an attempt to formulate a regulatory response to the growing Korean virtual

currency market.

Financial Regulations

Current Status

Korea's virtual currency

exchanges

The Korean government has yet to implement “know your customer”

(“KYC”) or anti-money laundering (“AML”) regulations to govern the sale and use

of virtual currencies in Korea. There are currently no regulations governing

virtual currency exchanges in Korea, and for the time being, such exchanges do

not need to be licensed or registered.

Until such time as the compulsory KYC and AML regulations are

implemented, the Korean government has issued recommendations to the commercial

banks to strengthen their KYC and AML process relating to virtual currency

transactions. Furthermore, the banking institutions with which the Korean

virtual currency exchanges maintain accounts have been issued recommendations

to confirm the adequacy of internal control systems of such virtual currency

exchanges and ensure that such systems provide reliable information for KYC and

AML purposes. The implementation of such recommendations is expected to occur

by the end of 2017.

Limitations on ICOs

Public offerings of securities in Korea must comply with the

regulations set forth in the Financial Investment Services and Capital Markets

Act (the “FISCMA”), which may include the preparation and submission of a

securities registration statement. In the context of an ICO or the sale of

virtual currencies in Korea, careful consideration must be given to whether

such virtual currencies constitute a “financial investment instrument” and a

“security”, each as defined in the FISCMA. Issuers of virtual currencies must

take care not to engage in any unauthorized public offering or solicitation

activities in Korea absent a corresponding registration under the FISCMA.

For your reference, the FSS and The Bank of Korea have issued

guidance earlier this year strictly limiting the overseas remittance of fiat

currency in relation to a purchase or sale of virtual currencies. Consequently,

Korean residents intending to wire funds to an overseas issuer or seller of

virtual currency in the context of an ICO or secondary trade of virtual

currency will likely be unable to find a foreign exchange bank willing to

process such wire transfers.

Pending Regulatory and

Legislative Matters

FSC proposals

The FSC announced a plan to propose amendments to existing

legislation that would impose KYC and AML requirements directly on Korean virtual

currency service providers, including virtual currency exchanges. However, it

is unclear whether and when such amendments will obtain the necessary approval

of the Korean National Assembly.

The FSC has also signaled its intention to enact new legislation

that would impose certain obligations, such as adequate disclosure requirements

and prohibition on virtual currency price manipulation, on virtual currency

service providers including virtual currency exchanges.

In the second half of 2017, it is expected that the FSC and the

FSS will lead the adoption by Korea’s virtual currency exchanges of certain

voluntary regulatory measures to provide greater investor protection and

additional control and oversight of transactions involving virtual currencies.

Examples of such measures include (i) segregation of customer funds from that

of the exchange, (ii) system upgrades and improvements and (iii) enhanced

security infrastructure including cryptographic key.

Other legislative proposals

Korean regulators are also considering a diverse range of other

legislative proposals including a registration or license requirement for

virtual currency exchanges and taxation of transactions involving virtual

currencies. Currently, however, the regulators’ position appears to be to

observe developments in other foreign jurisdictions prior to formulating any

comprehensive regulatory regime for implementation in Korea.

Criminal Regulations

The use of virtual currencies to facilitate criminal activities,

including for fraudulent purposes, may result in the imposition of criminal

penalties ranging from imprisonment to monetary penalties. In anticipation of

further regulation and legislation on virtual currencies in Korea, the scope of

criminal violations and breadth of their enforcement may increase in the

future.

Concluding Remarks

The Korean virtual currency market is expected to gradually

mature over the next several months as Korean regulators grapple with the

extent of regulations to impose. Despite the current unregulated nature of the

market, any potential involvement with virtual currencies in Korea should be

carefully devised and monitored in consideration of pending legislative and

regulatory actions.

*This update is intended as

a summary news report only, and not as advice. For legal advice, please

inquire with your contact at Bae, Kim & Lee LLC, or the following authors

of this bulletin

Sky (Sih Kyoung) YANG

T. 82.2.3404.0143

E. [email protected]

Jae In LEE

T. 82.2.3404.6537

E. [email protected]

David Soohyun JOO

T. 82.2.3404.0277

E. [email protected]

Se Yeong IM

T. 82.2.3404.7640

E. [email protected]