NFT, Excluded from Virtual Assets... Deposit Operation Profits Must Be Paid

Virtual Asset User Protection Act Scheduled for Enforcement on July 19 Next Year
Financial Services Commission Announces Legislative Notice for Enforcement Decree and Supervisory Regulations
Third-Party Consignment Deposit and Operation Will Be Practically Impossible Upon Law Enforcement

Non-fungible tokens (NFTs) are excluded from the definition of virtual assets under the Act on the Protection of Virtual Asset Users. Additionally, virtual asset user deposits must be managed by banks, and virtual asset service providers are required to pay deposit usage fees to users based on the profits earned from operating these deposits.

The Financial Services Commission announced on the 10th that it will conduct a legislative notice for the enforcement decree and supervisory regulations to specify the details of the Act on the Protection of Virtual Asset Users, which is scheduled to take effect on July 19 next year.

The enforcement decree and supervisory regulations first added a provision excluding NFTs, which possess uniqueness and are non-interchangeable with one another, from the scope of the Virtual Asset User Protection Act. This is mainly because NFTs are traded primarily for collection purposes, and the risks they pose to holders and the financial system are limited.

However, even if an asset is called an NFT, if it is issued in large quantities and traded in a fungible manner or can be used as a means of payment for specific goods or services, it will be included within the scope of virtual assets. The Financial Services Commission plans to consider preparing guidelines on NFT assessment criteria through consultations with relevant ministries and industry feedback to ensure clear law enforcement and prevent market confusion. Electronic bonds, mobile gift certificates, deposits that are essentially classified as deposits, and deposit tokens issued on the Central Bank Digital Currency (CBDC) network managed by the Bank of Korea are also excluded from the scope.

The Act on the Protection of Virtual Asset Users defines virtual assets as electronic certificates that have economic value and can be electronically traded or transferred, excluding CBDCs, game money, electronic money, electronically registered stocks, electronic bills, electronic bills of lading, and others.

The law also stipulates the institutions responsible for managing user deposits and the methods of operation. Considering credibility, stability, and the current deposit operation system, banks are designated as deposit management institutions. Banks must separate deposited or entrusted deposits from their own assets and may only operate them in safe assets such as purchasing government bonds, local government bonds, or debt securities guaranteed by the government or local governments. Virtual asset service providers must pay deposit usage fees to users, taking into account costs incurred from operating profits. Previously, Upbit was found to have received interest from K Bank on customers' Korean won deposits but did not pass this interest on to the customers.

Furthermore, to prevent hacking and other security breaches, at least 80% of the economic value of users' virtual assets must be stored in cold wallets. When subscribing to insurance or mutual aid, providers must either subscribe to insurance with a coverage limit of at least 5% of the economic value of virtual assets or reserve this amount as a reserve fund. If 5% of the economic value is below a certain amount, Korean won market exchanges must subscribe to insurance or reserve at least 3 billion KRW, and other virtual asset service providers must do so with at least 500 million KRW as coverage limits.

Additionally, the law defines the timing when undisclosed material information is made public, allowing insider trading, and specifies exceptional reasons for blocking deposits and withdrawals of users' virtual assets. The enforcement decree permits discretionary blocking of deposits and withdrawals only in cases such as system failures, requests by courts, investigative agencies, the National Tax Service, financial authorities under relevant laws, or when hacking or other incidents have occurred or are clearly expected. Violations require compensation for damages, and even when deposits and withdrawals are blocked for legitimate reasons, prior notification of the reasons must be given.

The law imposes obligations on virtual asset exchanges to monitor abnormal transactions and establishes procedures for imposing fines on unfair trading practices.

A Financial Services Commission official explained, "The enforcement decree and supervisory regulations specify detailed standards and methods to better protect users' assets and establish a sound order in the virtual asset market. We expect that when the Act on the Protection of Virtual Asset Users is enforced in July next year, a basic safety net for user protection will be established."

Meanwhile, once the Act on the Protection of Virtual Asset Users is enforced, deposit and operation businesses where virtual asset service providers entrust users' virtual assets to third parties for management will become practically impossible. The upcoming Act does not include specific regulations on individual business activities. However, it requires virtual asset service providers to effectively hold virtual assets of the same type and quantity as those entrusted by users.