Framework Act on Digital Assets imminent… What are three strategies for survival?

Last June, the 'Framework Act on Digital Assets' (hereinafter referred to as the Basic Act), which will fill the regulatory gap in the digital asset market and lay the foundation for the industry, was proposed, and all eyes in the industry are turning to the National Assembly. The bill will first include a clear definition of digital assets, as well as content on the rights of digital asset users and the obligations of digital asset business operators. Another key content of the bill is to require approval, registration, or reporting from the Financial Services Commission in order to operate a digital asset industry. The purpose is to establish market order and ensure financial safety while making it clear that the Financial Services Commission is responsible for managing and supervising the digital asset ecosystem.

If the 'Act on the Protection of Virtual Asset Users' (Virtual Asset User Protection Act), which has been in effect since July of last year, was a first-stage regulation to extinguish the urgent fire of protecting user assets and regulating unfair trade practices, this basic law is significant in that it is a second-stage comprehensive regulation that starts with entry into the digital asset industry and covers the issuance, distribution, disclosure, and transaction support regulations of digital assets. In other words, a basic law has been created in the digital asset industry that will play the same role as the Capital Markets Act, and now all related companies are faced with new regulations and responsibilities.

Industry reactions surrounding the implementation of the Basic Act are mixed. Securities, financial companies, and large companies are expected to benefit by seizing the opportunity to dominate the market and advance into new businesses, but many other small and medium-sized companies may face significant difficulties. What is problematic is the enormous cost incurred to equip human and material facilities and establish an internal control system. Beyond simply meeting capital requirements and having computer resources, hiring professional personnel such as compliance officers, risk management officers, and chief information protection officers, establishing large-scale control organizations, and establishing anti-money laundering and abnormal transaction detection systems are burdens that threaten the survival of small and medium-sized businesses. This is likely to ultimately accelerate market reorganization centered on large corporations with capital power.

Another concern is that the regulatory approach to be introduced domestically may conflict with global standards. For example, the European Union's 'MiCA' (Markets in Crypto-Assets Regulation) bill created a common market by introducing a single licensing system ('passporting') that allows businesses to operate in other member states once they are approved in one member state. However, since the Basic Law applies regulations, including licensing, to all overseas companies that provide services to Koreans, concerns are raised that it could lead to a disconnection from the global market.

So what preparations do digital asset-related companies need at this point to effectively adapt to the Basic Law in the future?

First, it must be preceded by understanding the legal nature of the digital assets and related business structures the company is handling. The bill stipulates a total of 10 digital asset industries, including trading, brokerage, storage, collective management, wallet management, discretion, and advisory, and then requires each business to obtain approval or complete registration and reporting (hereinafter referred to as authorization, etc.). After the passage of the Basic Act, digital self-employed businesses that have been outside the system can legally conduct business only if they meet the human and material requirements in accordance with the law and receive approval. Therefore, in order to conduct business without disruption during the enforcement period of the Basic Act, it is necessary to consult with an expert group such as a law firm, meet the necessary requirements for approval in advance, and proceed with the application process in a timely manner.

Second, a governance structure and internal control system at the level of a financial company must be established, and a risk management system must be established for financial and management soundness and computer stability. This is a problem that goes beyond simple regulations and is directly related to the trustworthiness of companies, and furthermore, it is a problem of the risk of being systematically expelled from the digital asset ecosystem. It is necessary to form a management team of people with expertise in digital assets as well as ethics and reliability, establish an independent compliance and risk management organization, and technically implement customer verification and suspicious transaction reporting procedures to thoroughly prepare for due diligence by regulatory authorities.

Lastly, all investment contracts, terms and conditions, and company internal regulations must be comprehensively reviewed. The Basic Law stipulates reporting procedures and standard terms and conditions when enacting or changing terms and conditions, and it is expected that this will lead to the exercise of large-scale supervision of contracts and terms and conditions within the industry. Past cases in which the Fair Trade Commission recommended corrections for unfair terms and conditions of virtual asset business operators can be used as a lesson. In addition, there is a need to elaborate internal regulations to the level of a financial company and ensure that internal control is implemented from the daily business level by reflecting the business conduct compliance requirements of each business operator.

At the time of proposing the Basic Act, the lead sponsor and the Digital Asset Committee stated that they aimed to pass it within the year, so there is not much time. Rather than hastily reacting after the law goes into effect, it is wise to prepare step by step now. What is most important is a change in perspective to view the Framework Act on Digital Assets as an ‘opportunity’ rather than a ‘regulation.’ As market reliability increases through institutional incorporation, more capital and excellent talent will flow in. Only companies that secure new growth engines through thorough preparation will be able to lead the future of digital finance.
 

Small Business Team

[View full article]
The Framework Act on Digital Assets is imminent... What are three strategies for survival? (Shortcut)