Blockchain companies in a legal grey area
As the legal definition of cryptocurrency remains unclear, blockchain companies have been doing business is legal gray zone. At a Korea-Singapore blockchain seminar held Tuesday, Attorney Kang Min-joo, specializing in blockchain and cryptoassets at Hanbyol Law, addressed five legal issues blockchain companies could potentially face: Classification as security under capital markets law First, is whether blockchain-based cryptocurrencies can be classified as securities. If companies are funded through the issue of tokens on their platforms, there’s a possibility of the transaction being categorized in a way that requires approval from the Financial Services Commission (FSC) or registration as an online brokerage for small-value investments. Exchange to points? Usage needs to be limited Companies involved in the “token economy,” which allows tokens to be converted into points or cash, may need to register with the FSC as an agent operator for payment services. However, if the tokens can only be converted into gift cards or points used within the website, there is a limit, therefore the company would only be engaging in the transfer of electronic information instead of directly engaging in a monetary transaction. In this case, the company will not be subject to FSC registration. Nonetheless, even companies exempt from registration should abide by the duties of operators of electronic financial services. “Even it not subject [to registration] at the moment, companies that transfer coins or points to currency should consider doing so in order to expand business in the future,” said Kang. Blockchain-based games should look out for gambling issues Blockchain-based games should carefully review whether the service has the possibility of being categorized as gambling. According to definitions from the state-run Game Rating and Administration Committee (GRAC), games that offer items based on pure luck, instead of the gamer’s ability, and allow the monetizing of such items, are categorized as gambling. On Sunday, GRAC refused to rate Nodebrick’s blockchain-based game Infinity Star, raising issues related to its gambling-like features. Infinity Star itself does not offer tokens, but users can make products using game items and sell these products in exchange for ethereum-based non-fungible tokens (NFG). The GRAC’s judgment was that as chance decided the results and the outcomes can be converted into virtual currency, the game could be gambling. “It is questionable whether we can see this as an exchange, but the GRAC refused to rate the game, saying it encourages gambling,” said Kang. “But it is not that [GRAC] is refusing blockchain, only games that it sees as having gambling features.” How should token-issuing companies respond to the special finance law? “It’s unclear whether token-issuers that undertake an ICO should seriously be concerned about the special finance law reform referring to the FATF guidelines,” said Kang. According to the special finance law, issuing tokens can be considered an act of transferring and trading tokens. “On an international level, the discussion of including token issuers in this category is still underway, so we’ll have to see what happens.” Cryptocurrency exchanges and OTC companies are already categorized as cryptocurrency managers. If the special law goes into effect, they will be the first group to be obliged to register. But at the moment, standards on obtaining accounts with verified identities remain vague and costs for obtaining information security management system (ISMS) certification issued by the Korea Internet & Security Agency is high—which makes it difficult for small-sized companies. “Blockchain-related companies should also check their adherence to the foreign exchange transaction law, regulations on fund-raising businesses and whether they are engaged in pyramid sales activities,” advised Kang.