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On February 6th, the FSC announced its STO guidelines. The guidelines contain two main parts: first, they set out the principles for determining which tokens qualify as securities. Second, the guidelines outline future regulatory developments for issuing and distributing token securities.
As expected, the scope of tokens as securities did not deviate significantly from the Fractional Investment Guidelines issued by the FSA last year. It reaffirmed the principle that even cryptocurrencies are securities if they qualify as a financial investment instrument under the Capital Markets Act and are a type of security.
Since the current Capital Markets Act does not require securities to take a specific form, it may be argued that the majority of tokens listed on cryptocurrency exchanges are securities. Investment contract securities are intended to be inclusive and complementary, and its definition includes new securities that are not typical securities but require investor protection measures, nonetheless.
However, such an interpretation would be needlessly excessive. Cryptocurrencies are assets with a utility of their own. Most utility coins can be utilized as a payment method on a platform, providing utility in itself. One of the definitions of a financial investment instrument is profitability. The profitability definition states that the investment must be made solely for profit. Even though one may purchase commodities such as rice or gold to earn a profit, it is not a financial investment because rice or gold possesses inherent utility. It is reasonable to consider utility coins as a general good instead of a financial investment instrument.
The STO Guidelines may be interpreted as a reaffirmation of this approach. According to the guidelines, a token is more likely to be considered a security if it exhibits the following characteristics:
- An equity interest in the operation of a business
- Dividend rights based on the performance of the business
- A claim to a proportion of the residual assets.
- The issuer attributes profits to the investor based on the performance of the business.
- The payments to the investor constitute a distribution of business profits.
Conversely, the following characteristics make it unlikely to be considered as securities :
- Used as a form of payment
- No promise of redemption
- No one is obligated to fulfill the obligations corresponding to the investor’s rights.
- Issued for the purpose of maintaining a stable value to be used as a medium of exchange.
- Only represents shared ownership in a real asset, with the issuer providing no guarantee of price or value increases.
Based on the above examples, it appears that the Korean FSC, unlike the U.S. SEC’s Howey Test, does not consider cryptocurrencies to be securities based on “cryptocurrency price appreciation” alone. In other words, apart from the natural price fluctuations of cryptocurrencies, there must be an additional “promise” from the cryptocurrency issuing project for the cryptocurrency to qualify as a security.
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