South Korea’s Financial Services Commission (FSC) has introduced new guidelines clarifying the regulatory status of non-fungible tokens (NFTs). As per Yonhap news agency, starting June 10, certain NFTs will be regulated as cryptocurrencies if they lose their distinct characteristics that set them apart from conventional cryptocurrencies.
What Determines an NFT’s Classification?
According to the FSC, NFTs that are mass-produced, highly tradable, divisible, or used for payments will be treated as cryptocurrencies. Conversely, NFTs that are non-transferable and hold minimal economic value will remain classified as regular NFTs. Examples include NFT proofs of transactions or concert tickets. An FSC spokesperson highlighted that NFTs issued in large quantities and used similarly to cryptocurrencies will undergo case-by-case reviews, with no absolute standard for their classification.
When Will the New Law Take Effect?
The guidelines are set to precede South Korea’s first comprehensive crypto regulatory framework, the Crypto Asset User Protection Act, which will be implemented on July 19. This law aims to curb illegal market practices, such as the use of undisclosed information for crypto investments, market price manipulation, and fraudulent activities. Additionally, it imposes stringent requirements on cryptocurrency service providers to safeguard user funds and ensure security.
The legislation mandates that over 80% of user funds be stored in cold storage and that service providers enroll in insurance programs to compensate users in case of security breaches. This is part of a larger two-phase regulatory approach, with the second phase focusing on standardizing crypto token issuance and investor information disclosure.
Implications for the Crypto Market
- Mass-produced NFTs could face stricter regulations as cryptocurrencies.
- Non-transferable NFTs with minimal economic value will retain their current classification.
- Cryptocurrency service providers must keep over 80% of user funds in cold storage.
- Insurance programs are required for user protection against security breaches.
In conclusion, South Korea’s new guidelines and upcoming legislation signify a significant stride towards creating a secure and transparent crypto market. By differentiating between types of NFTs and imposing rigorous security measures, the country aims to protect investors and curb illicit activities, paving the way for a more regulated and safer crypto environment.