[Viewpoint] Convergence of Securities Regulation and Coin Regulation

Seong Hee-hwal, Professor at Inha University School of Law

The co-authored work by British journalists Micklethwait and Wooldridge, "The Company: A Short History of a Revolutionary Idea," traces the history of the joint-stock company, a core element of the modern capitalist system. Interestingly, in its early stages of development about a century ago in the United States, the joint-stock company was sometimes treated similarly to today's virtual currencies (coins). While stocks and coins cannot be equated, the history of U.S. securities regulation offers insights into the future direction of coin regulation in South Korea.

From the late 19th century, joint-stock companies began to develop significantly both quantitatively and qualitatively, and stock investment became highly active. Between 1900 and 1928, the number of stock investors in the U.S. surged from about 4 million to 18 million. Consequently, investor protection issues became important, and starting with Kansas in 1911, state governments began regulating securities, which had previously been left to the self-regulation of various stock exchanges. The state blue sky laws, centered on fraud prohibition and licensing systems, required government approval based on substantive review before securities could be issued. The term "blue sky law" was coined to prevent fraudulent sales of shares by dividing the "blue sky" into plots.

The Great Depression triggered by the stock market crash in October 1929 led to comprehensive federal regulation of securities issuance and trading, culminating in the Securities Act of 1933 and the Securities Exchange Act of 1934, which remain in effect today. The 1933 Act's core was the adoption of strict disclosure requirements instead of a licensing system for securities issuance, while the 1934 Act was a comprehensive regulatory law mandating continuous disclosure by public companies, prohibiting unfair trading such as fraud and manipulation, and regulating the business conduct of securities firms and exchanges. A notable feature was the transition from pure self-regulation by exchanges to audited self-regulation operating within a national regulatory framework.

Thus, the history of U.S. securities regulation evolved from pure self-regulation → limited state regulation → comprehensive federal regulation. At each stage, when the limitations of existing regulations became clear and significant improvements were needed, the system advanced to the next stage. Comparing this phased transition to our coin market, the period before the implementation of the Act on Reporting and Using Specified Financial Transaction Information (the Special Financial Transactions Act) can be seen as an era of pure self-regulation by exchanges without applicable laws, and the period under the Special Financial Transactions Act corresponds to a limited regulatory stage. However, since the Special Financial Transactions Act is a law with a very limited purpose of preventing money laundering and terrorist financing, it cannot comprehensively regulate the vast coin market as it stands today. Therefore, a time of comprehensive national regulation, similar to the federal regulation era, is inevitable.

For comprehensive national regulation, an industry-specific law is necessary. This industry law would target payment-type and utility-type coins, while securities-type coins would be governed by existing capital market laws, posing no particular problem. Currently, the government maintains a watchful stance on the industry law, while members of the National Assembly have taken the lead in submitting bills for its enactment. Referring to the structure of the Capital Market Act, the key elements that should be included if the industry law is enacted are as follows.

First, regulation of ICOs (Initial Coin Offerings) is necessary to ensure the rationality and transparency of coin issuance. This is a primary task to fundamentally block fraudulent activities and protect investors. Second, the validity and predictability of coin listings and delistings must be secured. This area should be entrusted to exchanges but designed as audited self-regulation with government pre- and post-supervision. Third, measures to ensure fairness and efficiency in the secondary market are essential, including mandatory continuous disclosure obligations and strict penalties for unfair trading such as insider trading and price manipulation. Lastly, regulation of coin exchanges, which perform all functions separately divided among exchanges, securities firms, depositories, and securities finance in the securities market, is crucial. It is necessary to introduce an exchange licensing system, prohibit various unfair and improper acts by exchanges and their executives, ensure safe and transparent operation of exchanges, and stipulate investor compensation liability for damages caused by hacking or poor management of exchange systems.

[Seong Hee-hwal, Professor at Inha University School of Law]