[Opinion] Digital Asset Regulation Bill Suppressing Innovation and Challenge

Regulations Prevail Without Market Formation
No Disclosure Rules, So Punishment Is Impossible

On the 31st of last month, Yoon Chang-hyun, a member of the People Power Party, took the lead in proposing two bills regulating virtual assets. These are the "Act on Restoring Fairness in the Digital Asset Market and Creating a Safe Trading Environment" and the "Partial Amendment to the Act on the Establishment of the Financial Services Commission." The main points are to treat virtual assets similarly to securities, punish insider trading, market manipulation, and unfair trading practices, confiscate and recover assets obtained through such acts, and grant investigative authority to the Financial Services Commission and the Financial Supervisory Service.

As the chairman of the People Power Party's Special Committee on Digital Assets and a lawmaker representing digital asset policy in the ruling party, Yoon's bills inevitably carry significant weight in the upcoming legislative review process. However, upon examining the contents of the bills, there are many concerns.

First, Yoon's bills place excessive emphasis solely on 'regulation.' The bills are divided into five chapters: Chapter 1 General Provisions, Chapter 2 User Protection, Chapter 3 Regulation of Unfair Trading, Chapter 4 Supervision and Disposition, and Chapter 5 Penalties.

Notably absent is the regulation on Initial Exchange Offerings (IEO), which President Yoon Seok-yeol pledged. Issuance is a prerequisite for the existence of the market. If legislation proceeds as is, laws favoring only 'regulation' without market formation and nurturing will be created.

The digital asset market is like a bird that cannot fly with only one wing of 'regulation.' Both wings?market formation and nurturing?must work together for harmonious and stable flight. This is also the legislative direction of advanced financial countries, including the United States.

Second, even the penalty provisions in the bills may violate the principle of legality in criminal law. The biggest blind spot is the absence of any provisions on disclosure obligations. There are no regulations on who must disclose, by what method, or what must be disclosed. Without specific disclosure obligations, it is impossible to punish insider trading or unfair trading practices. The European Union’s digital asset regulation bill, MiCA (Markets in Crypto Assets Regulation), specifies issuance and disclosure requirements in detail.

Additionally, market manipulation must first be defined within a legal framework that allows a certain level of market-making activities, as in the stock market, but there are no such provisions. If legislation proceeds as is, the market will be thrown into tremendous confusion, unable to distinguish between legal and illegal activities.

Third, the lack of provisions supporting self-regulatory organizations is also regrettable. In May and June of this year, the ruling party and government announced plans to strengthen self-regulation of exchanges, leading five Korean won exchanges to establish the Digital Asset Exchange Association (DAXA). Self-regulatory organizations like the Korea Financial Investment Association can provide regulatory expertise and swift responses on behalf of authorities, enhancing regulatory capacity and outcomes. For self-regulatory organizations to function properly, related laws need to include provisions on their establishment and activities.

The world’s largest IT company, Google, announced it will start using virtual assets as a payment method next year. The future is rapidly changing, and if we fail to read the flow of change, industries and nations will inevitably fall behind. Creating laws focused solely on regulation and punishment while ignoring market realities and conditions is regulatory absolutism, which suppresses innovation and challenge.

There is no doubt that urgent measures are needed to protect well-intentioned virtual asset investors. All the more reason to carefully examine foreseeable issues and create high-quality legislation. Virtual assets are a borderless domain, and if legislation is made in isolation from countries like the United States, side effects will abound. No matter how urgent, you cannot thread a needle without a proper approach. We hope for thorough legislative review.

Kim Ki-dong, Chief Attorney, Law Firm Robax