Korbit Research Center Proposes Evaluation Method for Virtual Asset Securities

[Asia Economy Reporter Lee Jung-yoon] Korbit Research Center, under the domestic virtual asset exchange Korbit, announced on the 21st that it has published the second token security issuance (STO, Security Token Offering) series report titled "Virtual Asset Security Evaluation Method Report."

This report covers ▲ Proposal of virtual asset security evaluation methods ▲ Introduction of Korbit Security Rating Index (KSRI) ▲ Results of security scores for 36 virtual assets based on the Korbit Security Rating Index.

The Korbit Research Center explains that it is important to first understand that the scope of securities regulated in Korea and the United States differs. Unlike the U.S., where the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) separately oversee securities and commodities, Korea’s Capital Markets Act regulates both securities and commodities under a single law. Furthermore, the securities defined under Korea’s Capital Markets Act exclude derivatives from a broader asset group called ‘financial investment products,’ which encompasses both securities and commodities.

Based on the token security issuance and distribution guidelines presented by the Financial Services Commission, the Korbit Research Center proposed a method for evaluating the security nature of virtual assets. They stated that a spectrum approach is more desirable than a dichotomous black-and-white logic. Virtual assets vary individually depending on the contract relationships and circumstances established on the underlying asset. Therefore, it is difficult to judge the existence of investment contracts by a uniform standard. The Korbit Research Center pointed out, "In fact, the Financial Services Commission’s guidelines also express the evaluation of security nature in terms of high or low likelihood of being securities, so it should be seen as adopting a spectrum perspective rather than a dichotomous approach."

Additionally, they explained the necessity of considering both typical and atypical characteristics of securities when determining security nature. Under current law, most virtual assets exhibit more atypical security characteristics than typical ones. However, virtual asset groups such as stablecoins backed by fiat currency collateral are closely linked to traditional finance or have design structures very similar to typical securities. If regulations are partially amended, they could be regarded as typical securities. Therefore, the Korbit Research Center emphasized that when evaluating the security nature of virtual assets, it is necessary to include not only whether they are investment contract securities but also whether they correspond to typical securities.

Accordingly, the Korbit Research Center proposed the 'Korbit Security Rating Index (KSRI)' by adding their proposed security evaluation method based on Korea’s Capital Markets Act. This index quantifies the security nature of individual virtual assets on a scale from 20 to 100, allowing relatively easy comparison of the degree of security nature among virtual assets.

The Korbit Security Rating Index scores are assigned through a two-step evaluation process to consider both typical and atypical security characteristics. Although there are currently no virtual assets that clearly correspond to typical securities under existing law, some virtual assets have a high possibility of being classified as typical securities depending on future regulatory amendments. If the score in the typical security evaluation exceeds a certain level, it is considered highly likely to be a typical security, and the score from the first step is used as the final score. Otherwise, the evaluation proceeds to the second step, assessing atypical security characteristics that indicate investment contract securities, and this score becomes the final index.

Meanwhile, the questions and scoring system for this two-step security evaluation were adapted from the U.S. Crypto Rating Council (CRC) to fit domestic circumstances. The CRC is a joint consultative body voluntarily formed by major U.S. virtual asset companies such as Coinbase, Circle, and Kraken. They are known to be closely communicating with U.S. regulatory authorities and leading the institutionalization of virtual assets. The CRC’s security evaluation system is characterized by collecting opinions from U.S. securities law experts and organizing 36 security evaluation questions that address specific issues raised when applying the Howey Test, a sub-test used in U.S. court precedents to determine security nature, to virtual assets.

Korbit also disclosed the security evaluation scores for 36 virtual assets that have a history of trading support using the Korbit Security Rating Index. These 36 virtual assets include 33 items traded exclusively on Korbit among the top five domestic KRW market exchanges, as well as three relatively familiar assets in Korea: Bitcoin, Ethereum, and USDC. The evaluation results showed that no virtual asset scored 100, the value corresponding to securities under current Korean Capital Markets Act. USDC and Amp scored the highest at 90 points, Ethereum scored 30 points, and Bitcoin scored the lowest at 20 points.

Jung Seok-moon, head of the Korbit Research Center, said, "We devised the Korbit Security Rating Index to contribute even a little to the judgment of the security nature of virtual assets," and added, "We hope that this report will serve as an opportunity for more active communication between financial authorities and industry participants in discussions on the security nature of virtual assets."