South Korea: Digital assets can be subjected to securities law

The Financial Supervisory Service (FSS) of South Korea has hinted that some digital currencies might pass as securities under the country’s jurisprudence. Lee Bok-hyun, Governor of the FSS, disclosed his position to a local media house as he fielded questions related to the Terra-Luna collapse.

“I disagree with the view that some virtual assets do not have parts that can be recognized as financial investment products or securities,” said Lee to newsmen at the headquarters of the FSS. “As a lawyer or a person in charge of financial affairs, there is an option that if certain requirements are met, it can be judged as securities.”

Lee averred that prosecutions are well within their rights to attempt to determine whether or not a digital asset can be categorized as a security. He added that this prerogative does not lie with regulatory agencies, but that caution should be exercised in passing such judgments on virtual currencies.

His statements are coming on the heels of prosecutors viewing Terra’s stablecoin and native virtual asset as a security. The country’s law enforcement agencies have since opened legal action against Terra Founder Do Kwon, who was recently issued an arrest warrant by the Seoul Southern District Prosecutors’ Office. Early in the week, there were multiple reports that Kwon’s South Korean passport was about to be invalidated by the Ministry of Foreign Affairs as the hunt for his capture intensified.

Despite South Korea’s leading role in blockchain adoption and its pro-digital assets president, investors’ enthusiasm has been dampened since regulators intensified their investigation of exchanges over their role in the Terra saga.

Regulators pining for virtual assets to be seen as securities

The issue of regulators urging legislators to recognize virtual currencies as securities have attained global flavor. Perhaps, the United States is one jurisdiction where the calls have been amplified in recent months.

The U.S. Securities and Exchange Commission (SEC), led by Gary Gensler, has argued that several virtual currencies are subject to the Securities Act of 1934 under the Howey test.

In the case of SEC v W.J Howey, the Supreme Court held four prongs in determining whether or not an investment may pass for security. The elements include whether there has been an investment of money in a common enterprise, with the expectation of profit which is to be obtained through the efforts of others.

In applying the Howey test, the SEC believed that Ripple Labs had sold unregistered securities (XRP tokens) and dragged the company to court in December 2020. Nearly two years later, investors are nowhere close to knowing the position of virtual currencies regarding securities law.

Watch: The BSV Global Blockchain Convention panel, Law & Order: Regulatory Compliance for Blockchain & Digital Assets