South Korea has an opportunity to bolster innovation in digital assets as it develops new regulations for the sector, say Ripple’s Susan Friedman and Rahul Advani.
South Korea, which has long been at the forefront of implementing new technologies into its mainstream financial sector, was also one of the “first mover” countries in adopting blockchain technology and digital assets. According to a survey conducted by the Korea Financial Intelligence Unit (KoFIU), the total market size for digital assets in South Korea grew to USD 45.9 billion by the end of 2021.
The emergence of digital assets has transformed the global financial ecosystem into one that is increasingly accessible, transparent, fair and efficient. As more enterprises tap into blockchain technology, we are seeing new use cases being developed and new markets being opened up. Owing to that, South Korea is going full steam ahead with plans to enact a new regulatory framework by next year. Known as the Digital Assets Basic Act, the legislation will reportedly include provisions to enable more banks to offer crypto services, including real-time verification for crypto transactions.
However, the recent collapse of the Terra ecosystem is testament to how the meteoric rise of crypto in the mainstream market does not come without risks. Amid growing regulatory scrutiny, South Korea’s five largest crypto exchanges have recently agreed to new investor protection measures, including implementing an emergency system to shut down trading in excessively volatile tokens within 24 hours.
As South Korea joins governments around the world in reevaluating current regulations on digital assets, policymakers must confront critical questions including: How can consumers be better protected? What can we do to enforce greater transparency in the crypto sector?
Balancing regulatory oversight and crypto innovation
In March 2020, the South Korean parliament passed an amendment to the Act on the Reporting and Use of Specific Financial Transaction Information, with the aim of preventing money laundering and other crimes involving financial transactions in digital assets.
While the intent of the policy is sound, its broad scope for implementation has meant that almost all entities offering solutions using digital assets are brought under regulatory scrutiny – even if they are not digital asset exchanges. To date, only five entities in South Korea have met the requirements for full licensing, and over 60 entities have had to cease operations altogether. The inadvertent aftereffect: Firms onshore are now more hesitant to deal with digital assets due to fears of violating the new regulations – which in turn has had a drastic impact on innovation in the sector.
The issue of digital asset regulations in South Korea has evolved into a political one, with regulatory reform being one of the key topics of debate during the country’s recent presidential election. Despite much discussion on the importance of blockchain technology and digital assets, no concrete policy solutions have yet to be proposed or formalised. Looking ahead, as South Korea weighs new regulatory measures, it will also be vital to consider how the delicate balance between regulatory oversight and innovation can be upheld in the long term.
Tailor-made regulations for a rapidly evolving industry
Crypto regulations cannot be a one-size-fits-all solution. Recognising the need for a more tailored approach, Ripple has been meeting with regulators and central banks around the world to advocate for regulatory frameworks that support the growth of blockchain and digital assets.
In a recent whitepaper, we highlighted the need for regulatory changes and the importance of providing policy proposals to support innovation in South Korea’s digital assets sector. The whitepaper details an approach for understanding the evolving blockchain and digital assets ecosystem, while recommending a policy framework for blockchain and digital assets in South Korea.
Part of this policy framework is the fostering of digital asset innovation sandboxes. By allowing crypto players to test new and innovative products, services and business models in a safe and controlled environment, such sandboxes can help policymakers preempt risks. Take Singapore for example – crypto-asset player Hydra X was able to successfully test and validate its digital custody solution within the Monetary Authority of Singapore’s FinTech Regulatory Sandbox, enabling the company to receive a Capital Markets Services Licence and expand the range of its services upon graduating from the sandbox.
To that end, public-private collaboration through active dialogue between regulators and industry players is also key to establishing trust and greater transparency. For instance, the Financial Services Agency (FSA) of Japan hosted the Blockchain Roundtable in 2019, which brought industry experts, regulatory bodies and central banks together. This culminated in the launch of the Bitcoin Governance Initiative Network, which has since published open-source studies and reports on pertinent topics like NFTs and ransomware based on feedback received from the blockchain community. Such collaborative forums support regulatory clarity, as they bring regulators and industry stakeholders together to build rational and holistic frameworks for blockchain and digital assets.
Should these proposed policy recommendations get implemented – whether separately or collectively – they could ultimately lay the foundation for South Korea’s digital asset sector, thus enabling the country to strengthen and maintain its proud mantle of technological prowess.
By Susan Friedman, Head of Public Policy at Ripple and Vice Chair of Blockchain for Europe; and Rahul Advani, Policy Director for APAC at Ripple.