According to the 2023 Blockchain Industry Survey results released by the Ministry of Science and ICT in January 2024, the domestic blockchain industry in 2022 was valued at approximately KRW 402.6 billion, reflecting a 37.7% increase compared to 2021. However, the projected size of the domestic blockchain industry in 2023 showed a marked slowdown in growth, increasing by only 7.7% year-over-year to reach KRW 433.7 billion.

Although several token projects have been launched domestically, it is hard to find notable success. While token trading and investment through centralised exchanges remain active, the decentralised finance (DeFi) market continues to lag behind compared to other jurisdictions. In line with broader market trends, trading volume has been gradually declining.

There have been calls to permit cryptocurrency spot exchange-traded funds (ETFs) in Korea, following the U.S. Securities and Exchange Commission’s approval of Bitcoin spot ETFs and similar moves by Hong Kong and the U.K. to authorise spot ETFs for cryptocurrencies such as Bitcoin and Ethereum. However, regulatory approval in Korea has been delayed, as financial authorities continue to tighten and refine regulations related to virtual assets. Given this regulatory environment, the approval of cryptocurrency spot ETFs appears unlikely in the near future. However, the Financial Services Commission (FSC) announced in its report on current operational status, presented during the National Assembly’s National Policy Committee audit on October 10, that it plans to establish a Virtual Asset Committee to discuss the approval of spot ETFs and the allowance of corporate real-name accounts. Therefore, it is necessary to continuously monitor the situation.

The NFT market has contracted significantly, and NFT marketplaces have also seen a downturn. While token projects are increasingly seeking to expand overseas due to stricter domestic regulations, no Korean project has yet achieved substantial success abroad.

With regard to security token offerings (STOs), following the government’s issuance of guidelines related to security tokens, only one case has been designated as an innovative financial service under the financial regulatory sandbox. It is anticipated that relevant laws, such as the Financial Investment Services and Capital Markets Act (FSCMA) and the Act on Electronic Registration of Stocks, Bonds, Etc. will be amended in the future. Once these legal revisions are in place and the regulatory infrastructure for security token issuance is established, the STO market is expected to become more active, allowing for fractional investments in a wider variety of underlying assets through blockchain technology.

The adoption of blockchain and other distributed ledger technologies remains slow. A survey of blockchain service providers indicates that the primary demand for such services comes from the government, public sector, and industries such as cultural content, publishing, and video production. However, large-scale applications of this technology in major business sectors or public institutions are still rare.

There is currently no specific legislation or regulatory body governing blockchain technologies in Korea, nor is there a regulatory framework or legislation related to blockchain technologies itself that is expected to be implemented in the short or medium term. While legislative bills related to the development of blockchain technologies and the promotion of the industry have been submitted to the National Assembly, the focus remains on the more urgent task of preparing regulations for virtual assets. As a result, it will take more time before blockchain-specific (not focused on regulating virtual assets) legislation or regulatory frameworks are formalised. Therefore, the existing laws related to virtual assets (which do not directly regulate blockchain technologies) are outlined here.

Previously, the Act on Reporting and Using Specified Financial Transaction Information (Specified Financial Transaction Information Act) was the only regulation specific to digital assets. The Specified Financial Transaction Information Act broadly defines virtual assets as ‘an electronic certificate with economic value that can be traded or transferred electronically’ and defines those engaging in certain activities involving virtual assets as virtual asset service providers (VASPs). It imposes reporting obligations to financial authorities and anti-money laundering (AML) duties on such providers.

In February 2023, the financial authorities announced the ‘Measures to Overhaul Regulations to Permit Issuance and Circulation of Security Tokens’, clarifying that digital assets that exhibit characteristics of securities, referred to as ‘security tokens’, are distinct from virtual assets under the Specified Financial Transaction Information Act, and will be regulated as securities under the FSCMA. This framework defines security tokens as digital securities issued using distributed ledger technology. It sets out: (i) principles for determining whether a digital asset qualifies as a security and hence security token; and (ii) plans to establish a legal and institutional foundation for the issuance and distribution of security tokens.

Since then, as for virtual assets that do not have the characteristics of securities, the Act on Protection of Virtual Asset Users (the Virtual Asset User Protection Act), which functions as a sector-specific law, has been in effect since 19 July 2024. This law provides for the protection of virtual asset users’ assets (e.g., requiring VASPs to put user deposits separated from their own assets in a deposit or trust with a reputable institution, such as a bank, maintain insurance coverage, and generate and retain transaction records). It also prohibits unfair trade practices such as use of material non-public information, price manipulation, fraudulent transactions, and trading of self-issued or specially related-party issued virtual assets, and violators are subject to various penalties, including imprisonment, fines, and monetary surcharges. It stipulates the financial authorities’ powers, scope, methods, and measures regarding the supervision, inspection, and investigation of VASPs.

The primary regulators for virtual assets in Korea are the Financial Services Commission (FSC), along with the Financial Supervisory Service (FSS), which is delegated by the FSC to handle matters related to the Virtual Asset User Protection Act and the Specified Financial Transaction Information Act. The Financial Intelligence Unit (FIU), which operates under the FSC in accordance with the Specified Financial Transaction Information Act, is responsible for various tasks related to AML.

Under these laws, the financial authorities (the FSC, FSS, and FIU) are tasked with supervising the compliance of VASPs with the relevant legal requirements. They inspect the operations and financial conditions of VASPs and can impose corrective orders, business suspensions, monetary surcharges, or refer cases to investigative agencies such as prosecution if any violations of obligations are found. These authorities are also responsible for managing the registration, renewal, and cancellation of VASP licences.

As previously mentioned, there are no specific laws, policies, or regulatory bodies that govern blockchain technologies themselves.

The authorities do not hold a negative view of blockchain technologies, and the government supports pure research and development of blockchain technologies that are not associated with the issuance of virtual assets. Various blockchain-related technology support programmes are being run by organisations under the Ministry of Science and ICT, with hundreds of billions of Korean Won in funding provided annually for research projects aimed at developing blockchain technologies in the public sector.

For example, government-supported projects include a digital badge-based integrated employment support service (which allows users to consolidate information on certifications, educational background, and work experience into digital badges and generate digital CVs to submit to employers) and the construction of a lifelong higher education digital badge platform (a platform that issues digital badges integrating information on certifications, educational background, and education completion relevant to job seekers). These blockchain technology projects receiving government support typically have little to no connection to virtual assets.

One of the government-supported projects is the construction of a digital voucher management platform based on a Central Bank Digital Currency (CBDC), which was proposed by the Bank of Korea (BOK). Given its reliance on a CBDC, this project is somewhat unique and differs from general virtual assets.

The BOK, Korea’s central bank, has not yet decided whether to officially introduce a CBDC but has stated that it is thoroughly preparing for the possibility of future CBDC adoption.

In November 2023, the BOK, in collaboration with the financial authorities, announced the ‘Detailed Implementation Plan for CBDC Usability Testing’, revealing plans to conduct various CBDC usability tests.

These tests are divided into two categories: ‘real transaction testing’ and ‘technical experiments in virtual environments’. The real transaction testing will focus on improving existing systems, with initial efforts centred around a new digital voucher feature. Specifically, the testing involves issuing CBDC-based deposit tokens with embedded digital voucher functionalities, where a bank issues these tokens upon request from a client institution. Users will be able to use these tokens to purchase goods, after which the payment is settled with the merchant. Separately, the technical experiments in virtual environments will explore the technical feasibility of issuing and distributing new types of financial products. Three use cases have been selected for this testing: (i) experimenting with the circulation of new assets like carbon credits; (ii) testing the issuance of tokenised assets using smart contracts to ensure that only the final allocated amount is transferred to minimise settlement risk when assets are issued via public offerings; and (iii) testing the issuance of tokenised securities within the CBDC system, where financial institutions can bid for and settle securities using wholesale CBDC simultaneously.

Furthermore, in April 2024, the BOK plans to participate in the ‘Agora Project’, in collaboration with the Bank for International Settlements (BIS), seven central banks, and the Institute of International Finance (IIF).¹ The Agora Project is a large-scale global initiative aimed at enhancing the speed and transparency of cross-border payment services and reducing costs by utilising tokenised deposits and wholesale central bank digital currencies. Several major central banks of key reserve currencies, along with numerous private financial institutions, will participate in this project.

Footnote(s):

¹ https://www.bok.or.kr/portal/bbs/B0000502/view.do?nttId=10083405&searchCnd=1&searchKwd=%EC%95%84%EA%B3%A0%EB%9D%BC&date=&sdate=&edate=&sort=1&pageUnit=10&depth=201150&pageIndex=1&programType=newsData&menuNo=201265&oldMenuNo=201150

Financial regulation of virtual assets is broadly divided into two categories based on the nature of the virtual asset. First, if the virtual asset qualifies as a security under the FSCMA, it is classified as a ‘security token’ and is subject to the existing regulations governing securities. However, if the virtual asset does not qualify as a security but falls under the definition of a virtual asset as per the Virtual Asset User Protection Act, it will be subject to the specific regulations outlined in that law.

The Virtual Asset User Protection Act defines VASPs as those engaged in the business of selling, purchasing, exchanging, transferring, or safekeeping and managing virtual assets, as well as intermediating, brokering, or acting as agents in the selling, purchasing and exchanging activities. For VASPs, the law imposes: (i) asset protection obligations for virtual asset users; and (ii) regulations on unfair trade practices in the virtual asset market, although the latter largely incorporates provisions from the FSCMA.

Key regulations include asset protection measures, which require VASPs to: (i) deposit or entrust user funds separately from their own assets in a safe manner with a reputable institution, such as a bank; (ii) segregate user-owned virtual assets from their own virtual assets; and (iii) hold an equal amount of the same virtual assets as those entrusted by users. Additionally, VASPs must (iv) subscribe to insurance or establish reserves to cover liabilities arising from incidents such as hacking or system failures.

In terms of unfair trade practice regulations, the use of material non-public information, price manipulation, fraudulent transactions and trading of self-issued or specially related-party issued virtual assets are prohibited. Furthermore, VASPs are prohibited from arbitrarily blocking deposits and withdrawals without just cause, must continuously monitor for abnormal transactions which involve drastic fluctuations in price or trading volume, and must notify and report suspicious activities to financial authorities and investigative agencies.

Regarding DeFi services, financial authorities have stated that fully decentralised DeFi services, where it is difficult to identify a controlling entity, are currently outside the scope of regulation. However, they plan to develop reasonable regulatory frameworks in line with global regulatory trends. Nevertheless, financial authorities maintain that if an operator effectively holds control and provides financial services similar to deposit-taking, lending, or staking using virtual assets, regardless of whether the service is labelled as DeFi, the operator will be classified as a VASP and will be subject to the Virtual Asset User Protection Act and the Specified Financial Transaction Information Act.

In Korea, the amended Specified Financial Transaction Information Act, which imposes reporting obligations and AML duties on VASPs, has been in effect since 25 March 2021.

The Specified Financial Transaction Information Act references the definitions of ‘virtual asset’ and ‘virtual asset service provider’ (VASP) as prescribed in the Virtual Asset User Protection Act, meaning that the scope of regulation is identical under both laws.

VASPs are required to report to the FIU, which operates under the FSC. To submit a VASP report, VASPs must: (i) prepare the necessary reporting documents, including the application form and attached documents; and (ii) ensure that they do not meet any of the grounds for refusal of the report. The required documents include the articles of incorporation, a business plan, materials related to the Information Security Management System (ISMS) certification, and documentation on real-name deposit and withdrawal accounts. Recently, additional documents regarding the status of major shareholders and the system for complying with virtual asset-related laws have been added as mandatory submission items. The grounds for refusal of a report include: (i) failure to obtain ISMS certification; (ii) failure to use real-name deposit and withdrawal accounts; (iii) a criminal record (including for representatives and executives) within the last five years; and (iv) being within five years of having had a VASP registration revoked. However, real-name deposit and withdrawal accounts are not required if the VASP does not offer services for exchanging virtual assets with fiat currencies.

Additionally, under the Specified Financial Transaction Information Act, VASPs must fulfil AML obligations. Specifically, they are required to comply with customer due diligence (CDD) requirements, currency transaction report (CTR) obligations, suspicious transaction report (STR) obligations, the Travel Rule (mandatory provision of sender and recipient information for transfers of virtual assets exceeding KRW 1 million), and the prohibition of handling dark coins.

As previously mentioned, even if the term ‘DeFi’ is used, if the operator holds actual control and provides financial services similar to deposit-taking, lending, or staking using virtual assets, the operator may be considered a VASP and become subject to the Specified Financial Transaction Information Act.

From the tax law perspective, although there were no clear regulations regarding the taxation of virtual assets in the past, the ground rules regarding the taxation of virtual assets and the related matters thereto were provided with the amendment to tax-related laws in December 2020. However, regulations related to the direct taxation of virtual assets have been suspended until the end of 2024, and only some regulations governing the evaluation method of virtual assets have been in effect since 2022 and are currently in force (In mid-2024, a tax law amendment was announced by the Ministry of Economy and Finance to extend the tax deferral period for virtual asset investment income from the end of 2024 to the end of 2026 for two more years, considering the lack of taxation system and infrastructure related to virtual asset tax).

Notably, the Corporate Tax Act, which has been following the negative (inclusive) system in handling income generated from virtual assets, even before the above-mentioned amendment to the tax-related laws in December 2020, serves as the statutory basis for taxation for domestic (corporate) income; and  the Inheritance and Gift Tax Act, since the taxable object of inheritance and gift taxes is inclusively stipulated thereunder, serves as the statutory basis of taxation for inheritance and gift taxes. However, the Income Tax Act follows the positive system and income generated from virtual assets is not enumerated under the act and accordingly, income generated from virtual assets by a resident individual is deemed the taxable income identified under the amended Income Tax Act.

In terms of DeFi, there is no clear taxation threshold for DeFi under Korean tax law. As mentioned earlier, for fully decentralised DeFi services, it is difficult to identify a controlling entity, and therefore, it

Also, in the case of DeFi, transactions are typically conducted by depositing virtual assets on DeFi platforms and receiving interests or transaction fees.  In the case of a virtual asset lending contract where the loan and interest were calculated based on the amount of virtual assets (Bitcoins), Korean courts ruled that Bitcoin is not considered money and is not subject to the Interest Limitation Act and the Act on Registration of Credit Business and Protection of Finance Users. In such a case, the income generated from this type of contract will not be included as interest income. However, we cannot rule out the possibility that the courts might have ruled differently if the loan and interest under such contract were calculated based on the market price of the virtual assets. Therefore, each case should be looked at carefully based on its specific fact patterns.

Finally, the amended Adjustment of International Taxes Act includes the virtual asset-related accounts within the scope of foreign financial accounts subject to reporting obligations, and includes VASPs within the scope of foreign financial companies handling such foreign financial accounts subject to reporting obligations. However, the National Tax Service recently announced an official stance that crypto assets held through non-custodial and decentralised crypto wallets are not subject to such foreign financial account reporting.

Under Korea’s virtual asset-related laws, the use or trading of cryptoassets is not prohibited, and the financial authorities do not ban such activities as a matter of policy. However, as previously mentioned, the Specified Financial Transaction Information Act requires VASPs to register if they engage in the business of selling, exchanging, or brokering virtual assets. Therefore, when trading cryptoassets, it is advised to ensure that transactions are not conducted with unregistered VASPs. In particular, unregistered exchanges or service providers are likely to be engaged in illegal operations or even fraud, and consumer alerts have been issued warning of this risk.

Additionally, the Virtual Asset User Protection Act prohibits unfair trade practices related to virtual assets. Transactions involving price manipulation or the use of material non-public information would violate this Act and may lead to criminal penalties.

According to a survey conducted by the FSC on VASPs, as of the end of 2023, there were a total of 22 virtual asset exchanges registered and authorised to conduct virtual asset trading. Among these, five exchanges are able to facilitate trading in Korean Won. The daily average trading volume through VASPs in the second half of 2023 was approximately KRW 3.6 trillion, indicating that trading remains active. Notably, after the Luna-Terra incident, the market saw a sharp decline in trading volume during the first half of 2022. However, in the second half of 2023, the trading volume has been increasing again in line with the rise in the prices of virtual assets.

Although there is currently no law regulating the issuance of virtual assets, financial authorities have taken a negative stance on initial coin offerings (ICOs) in Korea and have banned them, despite not stating a clear legal basis for this prohibition. On 3 November 2020, when the government provided guidance on the amendment to the Enforcement Decree of the Specified Financial Transaction Information Act, which included provisions related to VASPs, it reiterated its position to maintain the de facto ban on ICOs in order to protect investors.

This position remains unchanged even after the enactment and enforcement of the Virtual Asset User Protection Act. However, the second phase of the Virtual Asset User Protection Act is expected to include regulations on the issuance of virtual assets, making it necessary to monitor future developments in this regard.

In February 2023, as mentioned earlier, the financial authorities announced the ‘Measures to Overhaul Regulations to Permit Issuance and Circulation of Security Tokens’. Previously, tokenised securities in non-standard forms were not accepted for securities registration under the FSCMA, making it practically impossible to issue security tokens. However, in April 2024, the issuance of security tokens was permitted as a designated ‘innovative financial service’ under the financial regulatory sandbox, allowing the issuance of tokens mirrored in electronic securities, in one specific case. The financial authorities have indicated plans to revise the relevant laws such as the FSCMA and the Act on Electronic Registration of Stocks, Bonds, Etc. Once the revisions are in place (until then, innovative financial service designation is required), it may become possible to conduct public offerings of security tokens (STOs), and accordingly, it will be important to monitor the upcoming legal amendments.

It appears that there are no specific restrictions on the transfer of ownership or the establishment of security interests in virtual assets held by virtual asset owners. However, it should be noted that deposit and management services cannot be utilised through VASPs. Specifically, Article 7(2) of the Virtual Asset User Protection Act stipulates that VASPs must hold the same kind and quantity of virtual assets entrusted by users. As a result, when a VASP is entrusted with the custody of virtual assets, they are required to hold those assets in full and cannot use them for deposit or management services. The financial authorities have also confirmed this position.

A smart contract is generally understood to mean the encoding of contractual obligations and counter-obligations into software or a protocol, where a computer determines whether conditions are met during the performance of the contract. However, under Korean law, there are no specific regulations governing smart contracts, nor have the financial authorities expressed any formal position on the matter. Therefore, smart contracts would, in principle, be governed by the traditional principles of contract law as set out in the Civil Act. Additionally, the application and regulation of specific laws, such as the Act on Consumer Protection in Electronic Commerce and the Act on Regulation of Terms and Conditions, would need to be examined on a case-by-case basis.

With the growth of the virtual asset market and the spread of DeFi, Decentralised Autonomous Organisations (DAOs) have garnered attention. In particular, in South Korea, there was a project launched in 2022 to establish a ‘National Treasure DAO’, which would allow anyone to participate in bidding on national treasures designated as state cultural heritage. The plan was for the DAO to raise funds in virtual assets to participate in treasure auctions, a project initiated by investors. Funds were collected exclusively in Klay, and the fundraising process was conducted through smart contracts on the Klaytn blockchain. The National Treasure DAO planned to issue NFTs representing the cultural heritage and all decision-making by participants was to be carried out on the blockchain. However, the auction did not proceed as the funding target was not reached.

Despite the increasing number of projects using DAOs, there are no laws, policies, or regulatory bodies specifically governing DAOs. Under current law, attempts to establish a DAO tend to be treated as a partnership under the Civil Act or an undisclosed partnership under the Commercial Act. However, these legal structures differ from DAOs, which are characterised by autonomous governance by investors. As a result, there have been discussions on the need to develop a legal framework that better fits the characteristics of DAOs.

The Ministry of Science and ICT, when announcing the results of its 2023 blockchain project support and future policy direction, highlighted the establishment of the legal status and regulatory framework for DAOs as one of the ten key legislative tasks under the proposed Blockchain Industry Promotion Act (tentative name). This initiative was in line with the global trend of discussing and developing the legal status of DAOs in various countries around the world. In this context, although the Blockchain Industry Promotion Act and other related bills were introduced in the 21st National Assembly, these bills were discarded due to the expiration of the National Assembly’s term.

As mentioned above, there are currently no laws, policies, or regulatory bodies specifically governing blockchain technology itself. Consequently, there appear to be no governmental or regulatory enforcement actions directly targeting blockchain itself.

However, as previously noted, virtual assets implemented using blockchain technology are regulated under the Specified Financial Transaction Information Act and the Virtual Asset User Protection Act.

In 2022, the financial authorities reported 16 unregistered VASPs to investigative agencies for violating their reporting obligations under the Specified Financial Transaction Information Act (for reference, illegal unregistered business activities can result in imprisonment of up to 5 years or a fine of up to KRW 50 million). Furthermore, measures were taken to restrict these providers from registering as domestic VASPs for a certain period, and the authorities requested the Korea Communications Commission and the Korea Communications Standards Commission to block domestic access to these services.

Additionally, on 8 February 2024, the financial authorities announced the ‘2024 Financial Intelligence Unit (FIU) Work Plan’. According to this plan, the financial authorities will: (i) refocus supervision and inspections of financial institutions from detecting and punishing violations to strengthening practical AML capabilities; (ii) enhance AML inspections and reporting reviews of VASPs to combat crimes involving virtual assets and foster a healthy market; (iii) concentrate analytical capabilities on detecting virtual asset-related and illegal private finance crimes; and (iv) significantly strengthen laws and systems to elevate the national AML framework to international standards.

Furthermore, with the enforcement of the Virtual Asset User Protection Act on 19 July 2024, regulations have been formally introduced to protect user assets and prevent unfair trading in virtual assets. The existing AML and entry/exit regulations under the Specified Financial Transaction Information Act have also been reinforced. As mentioned above, specifically, VASPs are strictly prohibited from engaging in unfair trading practices such as the use of material non-public information, price manipulation, fraudulent transactions, and trading of self-issued or specially related-party issued virtual assets. Severe penalties apply for any violations of these regulations.

In relation to this, on 8 July 2024, the financial authorities announced their plan to thoroughly investigate unfair trading in the virtual asset market in order to establish market order. On 4 September 2024, they further declared that they would focus on inspecting major VASPs, who handle a significant portion of domestic virtual asset transactions, to ensure compliance with the regulations and establish market order. Additionally, they intend to conduct on-site inspections of businesses that have poor financial health or weak internal controls over the custody of virtual assets, which may pose risks of harm to users. They will also monitor businesses for market manipulation and other unfair trading practices by checking their surveillance systems and operational practices to maintain a healthy trading environment.

Meanwhile, prior to the enforcement of the Virtual Asset User Protection Act, the prosecution had investigated and prosecuted cases related to the issuance or listing of virtual assets and unfair trading under the Criminal Act (such as fraud, embezzlement and obstruction of business) and other laws such as the Act on Regulation of Conducting Fund-Raising Business without Permission and the Act on Door-to-Door Sales. However, following the enforcement of the Virtual Asset User Protection Act, with respect to unfair trading activities, investigations and prosecutions are expected to be conducted under the Virtual Asset User Protection Act.

There are no generally-applicable laws, case law, or regulations that specifically govern blockchain itself.

However, the Personal Information Protection Act was amended on 19 July 2022 to address the challenge of deleting personal information recorded on a blockchain, given the difficulty of such deletion. The Personal Information Protection Act establishes specific methods for destroying personal information recorded on a blockchain.

In particular, the Personal Information Protection Act provides that in cases where there is significant difficulty in permanently deleting personal information due to technical reason, such as with blockchain, the information must be anonymised so that individuals can no longer be identified, even when using other data, considering factors such as time, cost, and technology. According to Article 21 of the Personal Information Protection Act and Article 16 of its Enforcement Decree, personal information controllers must destroy personal information without delay once the retention period has expired, the processing purpose has been achieved, or the period for processing pseudonymised information has elapsed. In the case of electronic files, they must be permanently deleted in a way that makes recovery impossible. However, where permanent deletion is significantly difficult due to technical characteristics, the information must be anonymised to prevent recovery.

The Personal Information Protection Commission has indicated that various technologies can be used for this anonymisation process, such as encryption, permutation (substitution), tokenisation, and random number generation to replace all or part of the personal information.

The FSC has recently expressed its plan to support the second phase of virtual asset legislation. This second phase of legislation is expected to focus on the qualification requirements for VASPs, disclosure regulations, and the regulation of business activities.

Additionally, in the report on its operations submitted to the National Assembly’s National Policy Committee on 10 October, the FSC stated that it plans to form a Virtual Asset Committee under the Virtual Asset User Protection Act to discuss key issues such as the approval of virtual asset spot ETFs and the allowance of corporate accounts for virtual asset transactions.

Therefore, it is important to closely monitor future developments and legislative discussions related to these key issues.