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Global Regulatory Trends on Virtual Assets and the Implications for Korea
2020 Jan/07
Global Regulatory Trends on Virtual Assets and the Implications for Korea Jan. 07, 2020 PDF
Summary
Facebook’s recent attempt to issue Libra, a global stablecoin, is a reminiscent of the imminent commercialization of virtual assets in our everyday life despite lingering regulatory uncertainties. Although the uncertainties regarding the potential risks inherent in virtual assets have become a deterrence, virtual assets including global stablecoins are expected to play a crucial role in commercial and financial transactions going forward. This calls for Korea’s regulatory authorities to accelerate its overhaul on the regulatory framework governing overall virtual assets including stablecoins.
Given overseas regulatory moves, it’s advisable for regulators to consider the followings in devising Korea’s virtual asset regulatory framework. First, it’s desirable to give virtual assets a clear legal basis that enables stable operations of relevant economic activities. Second, full, holistic consideration should be made to build up a regulatory framework that is consistent with global regulations. Third, the central bank should positively consider whether it’s proper to issue the central bank digital currency (CBCD) given the expansion of virtual assets.
Facebook unveiled its Libra project on June 18, 2019 amid expectations for providing innovative financial services to the estimated 1.7 billion financially marginalized who have limited access to conventional financial services. In response, however, governments across the globe as well as international organizations such as the BIS, FSB, G7, etc. stated that the Libra plan requires thorough regulatory review, and that they could impose proper regulations and accountability on Libra if deemed necessary for the sake of investor protection and financial stability. Most importantly, G7 nations expressed opposition to the issuance of global stablecoins1) before they fully address the legal, regulatory, and supervisory risks. This reaffirms the high levels of regulatory uncertainties despite the great potential of Libra’s commercialization. What seems apparent at this stage is that Libra made regulatory authorities and market participants in major developed economies refresh their attention on virtual assets.2)

However, Korea’s regulatory support to virtual assets somewhat lags behind overseas moves for reviewing the efficiency and risk of virtual assets to bring them into the regulatory territory. Korea’s first regulatory attempt in this area appears to be the revision bill on the “Act on Reporting and Using Specified Financial Transaction Information” (“the RUSFTI Act” hereinafter) approved by the National Policy Committee on November 21, 2019. If the bill passes into law, this will be the first law regulating virtual assets. However, the RUSFTI Act only partially reflects the provisions on combating money laundering and terrorism financing in the Financial Action Task Force (FATF) guidance and standards.3) The law lacks concrete regulatory directions, e.g., the legal definition on economic substances of virtual assets that are used for commercial and financial transactions; stability of the settlement system; data protection; investor and consumer protection; tax compliance, etc. Given the rapid advancement of virtual assets and associated financial transactions, the enactment or revision of relevant financial laws and regulations should be made to include those transactions in the regulatory boundary. Against the backdrop, this article first explores overseas regulatory developments in virtual assets, and then reviews what should be considered in devising Korea’s regulatory framework. 


Overseas regulatory moves amid the rise of stablecoins such as Libra

Although bitcoins, one of the most representative early-stage virtual assets, are known to be highly innovative, they have exposed many limitations, e.g., its high price volatility, limited scalability, complex user environment, etc. Especially, inflows of speculative trading pushed up price volatility even to the extreme level, hindering bitcoins’ role as stable means of payment.

Stablecoins represented by Libra effectively addressed most of the problems inherent in early-stage virtual assets, and thus significantly increased the probability of successful commercialization. Although the concrete mechanism is not publicly unveiled yet, Libra demonstrates the possibility where it stabilizes the value via the reserve system while securing commercial versatility by establishing a kind of trade association with global players in many areas. Other latecommers followed suit, stabilizing the innate value by linking the value to safe assets or certain portfolio assets. This means that more stabilized stablecoins could evolve into a global means of payment and settlement boasting its speedy and less-costly transactions. 

Regarding the emergence of stablecoins, regulatory authorities in developed countries have expressed concerns, rather than positive opinions. Of course, it doesn’t mean that they outrightly deny the usability and potential of stablecoins. Rather, they appear to be committed to a reserved stance until there’s a sufficient regulatory and supervisory overhaul and the associated risks are properly contained. More specifically, G7 finance ministers and central bank governors raised concerns that stablecoins might give rise to a material problem from regulatory and systemic perspectives at the G7 meeting held in Chantilly, France in July 2019. G7 nations also agreed that stablecoins and the operators should comply with the highest regulatory standard as well as prudential regulation and oversight. Alongside with this, the G7 Working Group issued a report4) to present challenges and policy risks in regulatory and supervision that should be addressed before the commercialization of stablecoins as listed below.

ㆍ  Legal certainty: Establish a well-founded, clear and transparent legal basis.
ㆍ  Sound governance: Establish sound governance that enables stable operations of stablecoins, ensuring operational sustainability and minimizing potential conflicts of interest between issuers and owners.
ㆍ  Financial integrity: Apply the highest international standards for anti-money laundering (AML) and combating financing of terrorism (CFT) to stablecoins.
ㆍ  Safety, efficiency and integrity of payment systems: To ensure safe and efficient operations of the system, stablecoin arrangements comply with the same requirements as traditional payment systems as well as providers of payment services.
ㆍ  Cyber and other operational risk considerations: Regulators devise proper regulatory and supervisory frameworks to minimize any cyber security and operational risk arising from stablecoin operations.
ㆍ  Market integrity: Transparent and fair pricing of stablecoins in the primary as well as secondary markets
ㆍ  Data protection: Devise rules on how to properly manage the data used in the stablecoin ecosystem.
ㆍ  Consumer/investor protection: Consumers and investors should be informed of all material risks and their obligations, while market participants must abide by relevant capital market laws and regulatory frameworks if stable coins are regarded as a security or a financial instrument.
ㆍ  Tax compliance: Stablecoin operators or users should abide by applicable tax laws and mitigate any potential avoidance of tax obligations.


International organizations’ recommendations on stablecoins

As virtual assets become more usable with the rise of stablecoins, international organizations such as G7, the IMF, and the BIS have exerted effort to build up an effective regulatory framework and an international coordination system. Stablecoins could be used in the global markets depending on the design and partnership. If used globally, stablecoins could significantly affect each government’s financial policy as well as the central bank’s monetary policy. Accordingly, international organizations recommend that public sector stakeholders (government departments, central banks, standard-setting organizations, etc.) make coordinated effort to develop a broad-based roadmap that improves the overall financial market system including the payment and settlement systems. The rise of a global stablecoin means a completely new approach to the access to bank accounts as well as the payment and settlement systems. This requires governments across the globe to upgrade their standardization in the payment and settlement process, and to facilitate the indirect or direct link between payment and settlement infrastructure. Also necessary are a clear legal basis for nascent payment systems, an international standard via coordinated effort, and an information sharing and monitoring framework among government authorities. 

The G7 Working Group on Stablecoins pointed out that central banks around the world could review the possibility of issuing central bank digital currencies (CBDC) either independently or collectively given the possible proliferation of stablecoins. There exist many types of CBDCs: digital tokens used for interbank settlement by financial institutions; accounts at the central bank for the general public; and a digital “cash” token used by the general public in small-sum payments. The Working Group stressed that the issuance of a CBDC by a central bank should be preceded by thorough preparation given its grave consequences on implementing the monetary policy and maintaining financial stability. It’s worth paying attention that CBDC issuance has garnered growing interest both among the general public and in academic circles. 


Implications for Korea’s regulatory framework

Overseas regulatory moves on stablecoins and virtual assets have the following implications for Korea’s regulatory framework on virtual assets. First, a clear legal basis should be established on virtual assets to ensure stable operations of relevant economic activities. By contrast to overseas moves to proactively control virtual assets by giving them a legal status, Korea relatively lags behind in such effort. It’s hard to deny the economic utility inherent in virtual assets. Given their great potential in the upcoming future, it’s desirable to give them a clear legal definition and make institutional support to ensure trade transparency, systemic stability, data protection, and fair taxation. The currently proposed revision on the RUSFTI Act only covers the transparency of money management using virtual assets. Also necessary is an effective regulatory framework that deals with all areas of financial transactions relevant to virtual assets. 

Second, cooperation and coordination at the international level is a precondition to a domestic regulatory framework. In nature, virtual assets target the global market primarily because of their network effect and benefits from the access to big data. This means that virtual assets could paralyze or detour a regulatory framework in a specific nation, and thus affect the monetary policy as well as the international monetary system. Hence, a virtual asset framework needs a structure that ensures global consistency. Such regulatory consistency could be secured only after full, holistic consideration of global regulatory moves and Korea’s market conditions.

Third, the central bank should positively review whether it’s proper to issue a CBDC amid the expansion of virtual assets. If global stablecoins fully take hold, this could completely alter the usefulness of the traditional central bank currency. If they are widely used as store of value, this will definitely affect the central bank’s monetary policy effect as well as the path of market interest rates. That means a change in how the central bank implements the monetary policy, implying a new type of operation based on digital currencies. Korea needs to be more engaged in this issue given heated discussions on issuing the CBDC in China and Europe. 

Facebook’s recent attempt to issue Libra, a global stablecoin, is a reminiscent of the imminent commercialization of virtual assets in our everyday life. What seems obvious for now is global stablecoins’ potential that could provide a novel approach to now cumbersome payment services and access to financial accounts across nations. Also obvious, however, is that global stablecoins cannot address all issues in the current payment system. Another shortfall is the lack of knowledge concerning what potential risks global stablecoins could pose. Nevertheless, virtual assets including global stablecoins are forecast to have a pivotal role in commercial as well as financial transactions in the near future. This calls for Korean policymakers to accelerate the overhaul on Korea’s framework on virtual assets including stablecoins. 
 
1) A stablecoin means a virtual asset (or a class of cryptocurrencies) designed to minimize price volatility. It maintains the stability of the asset value either by using a certificate of deposit for the exchange with fiat currency; using an underlying asset; or the issuer’s credit worthiness.
2) This article uses virtual assets as a cover term referring to the cryptocurrency, virtual currency, virtual money, etc, following the FATF recommendation and the proposed revision on the RUSFTI Act.
3) FATF, 2019, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, The FATF Recommendations. 
FATF, 2019, Guidance for a Risk-based Approach, Virtual Assets and Virtual Asset Service Providers.
4) BIS, G7, IMF, 2019, Investigating the Impact of Global Stablecoins, G7 Working Group on Stablecoins.