Last week, The Korea Times, a mainstream media founded by the country’s largest newspaper Hankook Ilbo, reported that sources within the government revealed the plans of local financial authorities to legalize initial coin offerings (ICOs) in the future.
"The financial authorities have been talking to the country's tax agency, justice ministry and other relevant government offices about a plan to allow ICOs in Korea when certain conditions are met," an unnamed source told The Korea Times who asked to remain anonymous due to the sensitivity of the subject.
Concerns regarding investor protection
Most recently, Choi Jong-ku Financial Services Commission (FSC) chairman expressed his concerns towards domestic ICOs, citing high risks involved for investors within the cryptocurrency market.
In a conference held at the Seoul Government Office, FSC chairman Choi stated that the agency still remains skeptical towards the investor protection policies in place. Choi’s statement translated by Cointelegraph read:
“There is a possibility that during the creation and issuance of a new digital currency through an ICO, various Ponzi schemes and scam operations may emerge. The agency will remain its negative stance towards the investor protection policies currently imposed on the local cryptocurrency market.”
Still, despite the concerns over investor protection by the FSC, several sources within the government told The Korea Times that local financial authorities are attempting to authorize domestic ICOs by enabling strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems, as well as a taxation policy for investors.
US SEC and South Korea on the same page
In essence, the South Korean government is willing to allow companies to conduct ICOs as long as the token sales are registered with the government, which is similar to the viewpoint of the US Securities and Exchange Commission (SEC).
In December 2017, the US SEC stated that while private ICOs can be conducted within the US targeting local investors, they must be registered with the SEC. As of December, the SEC stated that there were no ICOs registered with the agency and that no ICOs are allowed to accommodate US-based investors.
“A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation. Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies,” the SEC said.
However, the SEC has not completely ruled out ICOs. Its chairman Jay Clayton stated in a cryptocurrency hearing that every ICO is a security because the value of tokens is directly affected by the performance of the businesses distributing them, as Cointelegraph previously reported.
Currently, the South Korean government is on a similar page with the US SEC, in that it is willing to allow ICOs that are registered with local financial authorities and are conducted transparently. Another unnamed source within the government told The Korea Times:
“Various scenarios such as the imposition of a value-added tax, a capital gains tax, or both on trade; and the collection of corporate tax from local cryptocurrency exchanges, as well as the initiation of authorized exchanges with licenses are being discussed.”
FSC cryptocurrency trading policies director Kang Young-soo confirmed that there are speculations about the potential legalization of ICOs, as he said:
"There are many speculating about the possibility of allowing ICOs. The FSC has acknowledged a third-party view regarding the issue, but there's nothing that we can say officially at the moment.”
Reasons behind ICO legalization
On March 5, several mainstream media outlets in South Korea including Asia Business and Huffington Post Korea revealed that Kakao, the country’s largest Internet conglomerate which oversees KakaoTalk, KakaoPay, KakaoStory and KakaoTaxi, applications that have over 90 percent market penetration in their respective markets including fintech, taxi service, messaging, and social media, is focusing on integrating cryptocurrencies for its 12,000 merchants and over 100 mln users.
Kakao is reportedly planning to integrate cryptocurrencies on all of its applications, which would allow users to utilize KakaoPay to send and receive cryptocurrencies while paying for services on platforms like KakaoTaxi. Kakao also revealed its plans to conduct an ICO and to release its own token.
But, Asia Business reported that due to the current regulations on domestic ICOs, Kakao is planning to conduct its ICO outside of South Korea, to circumvent local policies.
If Kakao decides to conduct its ICO elsewhere and moves its Blockchain business outside of the country, it may lead to a substantial loss for the South Korean economy, especially in the Blockchain sector. It could lead to a domino effect, convincing other businesses and startups targeting the Blockchain sector to move outside of South Korea.
Almost immediately after reports around Kakao’s plans to launch an ICO outside of the country were released, FSC chairman Choi stated that the ICO of Kakao may violate existing regulations established by the local government.
“Even if there is no prohibition on cryptocurrency or digital asset trading, there is a possibility that it [Kakao ICO] may be regarded as fraud or multi-level sales according to the issuance method. Since the risk is very high in terms of investor protection, the government has a negative stance on the ICO.”
It is entirely likely that the South Korean government is moving towards legalizing ICOs to prevent the country’s leading conglomerates from leaving South Korea to conduct ICOs, which may damage the local Blockchain sector and cryptocurrency industry.