Bank of Korea Acknowledges the Need for IEO for Crypto Assets (Updated Dec 2022)

[Executive Summary]

• The Bank of Korea has diagnosed that it is necessary to introduce an initial exchange offering (“IEO”) system for crypto assets in Korea and to review the application of foreign exchange transaction regulations for stablecoins. In the report “Key Issues and Legislative Directions on Crypto Asset Regulation”, the Bank of Korea acknowledged that it is necessary to consider the introduction of an IEO which allows only the issuance of crypto assets that have undergone screening by the exchange and prohibiting fundraising through initial coin offering done individually by crypto asset issuers. The report pointed out that there is a need to discuss whether to apply foreign exchange-related regulations to crypto asset trading, especially with increasing cross-border remittances of crypto assets and stablecoins.

The Bank of Korea has diagnosed that it is necessary to introduce an initial exchange offering (“IEO”) system for virtual assets in Korea and to review the application of foreign exchange transaction regulations for stablecoins.

On December 5th, the Electronic Finance Investigation Team of the Bank of Korea’s Financial Settlement Bureau announced in the report “Key Issues and Legislative Directions on Crypto Asset Regulation” (“Report”) that it is necessary to consider the introduction of an “Initial Exchange Offering,” which allows only the issuance of crypto assets that have undergone screening by the exchange, and prohibiting fundraising through initial coin offering done individually by crypto asset issuers.

The Report claimed that investors can be better protected by having exchanges sell crypto assets to investors after evaluating the issuing company’s manpower, technology, finance, and business strategy, rather than the issuing company selling the assets directly to the investors. The report stated that “As the project evaluation ability and process of a crypto asset exchange are important when introducing an IEO, exchanges need to develop screening standards and procedures.

The Report pointed out that there is a need to discuss whether to apply foreign exchange-related regulations to crypto asset trading, especially with increasing cross-border remittances of crypto assets and stablecoins. It also mentioned that it is necessary to clarify the legal nature of crypto assets, such as stipulating the transfer and deposit of crypto asset purchase funds and related rights trading as capital transactions under the Foreign Exchange Transactions Act (“the Act”), as well as to discuss whether to apply the Act to the global stablecoins operating in the Korean market.

To better protect investors, the report proposed a plan to enact a special law imposing obligations on crypto asset issuers to publish white papers, disclose the results of regular external accounting audits, and specify essential items in the white papers. For issuers and service providers of stablecoins, which are highly likely to be used as a means of payment, the report sees it necessary to strengthen the duty to explain the types of reserve assets and evaluation methods.

Regarding the entry regulation, the Report emphasized the necessity to apply the registration and authorization system for crypto asset service providers and make the crypto asset exchange subjected to registration and authorization as a stock company, establishing sound regulations such as capital requirements and regular external audits. It is said that only corporations such as digital currency service providers that meet certain requirements of banks, having a minimum capital and qualified reserve assets, for instance, should be allowed to issue cryptocurrencies and enter the market.

The Report defined a crypto asset as something that represent digital values ​​or rights that are stored and transferred based on a distributed ledger or similar technologies, including the function of value storage and means of exchange in the concept of crypto assets. The Report believes that crypto assets (securities tokens) with a securities nature should be regulated by applying the Financial Investment Services and Capital Markets Act, not a separate special law, and recommended minimal regulations for utility tokens.

If IEO is implemented in Korea, it has the potential to alter the ecosystem of the Korean virtual asset market as well as the structures of many VASPs. There is a high chance of the introduction of IEO to be realized because the Bank of Korea is one of Korea’s most instrumental financial institutions possibly with the most influence in the industry. Follow our updates to discover any latest developments regarding this matter.

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