South Korea Gets Strict with NFTs: New Guidelines Released

• NFTs with mass issuance or divisibility are now classified as virtual assets in South Korea.
• Businesses must register as virtual asset operators if their NFTs meet the new regulatory criteria.
• NFTs used for payments or exchange with virtual assets face stricter regulatory scrutiny.

South Korea’s financial regulators have issued new guidelines under the “Virtual Asset User Protection Act” to clarify which NFTs fall under virtual asset regulations. The Act, which takes effect on July 19, 2024, aims to increase regulatory clarity in the growing NFT market.

Previously, NFTs were generally excluded from the virtual asset classification. However, the new guidelines specify that NFTs with certain characteristics — such as mass issuance, divisibility, or use as a means of payment — will now be classified as virtual assets.

The guidelines outline several key points. NFTs designed for “content collection purposes” are typically excluded from virtual asset regulations. NFTs are first evaluated to determine if they qualify as securities under the Capital Markets Act. If so, securities regulations apply.

NFTs are considered virtual assets if they meet specific criteria. This includes NFTs issued in large quantities or series, diminishing their uniqueness and increasing fungibility. Additionally, NFTs that can be divided into smaller units, thus losing their unique nature, fall under this category.

NFTs used directly or indirectly as payment for goods or services, or those that can be exchanged for other virtual assets, are also classified as virtual assets. The guidelines do not specify an exact threshold for “large quantities” to prevent regulatory evasion.

Businesses involved in NFT distribution and handling should review these guidelines carefully. If an NFT qualifies as a virtual asset, businesses must register as virtual asset business operators under the “Specific Financial Information Act.” This requirement applies to activities involving the sale, exchange, transfer, storage, management, or brokerage of NFTs. Non-compliance can result in criminal penalties.

For businesses uncertain about the classification of their NFTs, the Financial Services Commission offers consultation services and plans to share more specific examples to aid in compliance. These measures aim to prevent the misuse of NFTs to circumvent virtual asset regulations while ensuring that legitimate NFT projects for content collection remain unaffected.