OPINION
2023 May/16
Thoughts on Whether a Digital Asset is a Security under the Comprehensive Regulatory Framework on Financial Investment Instruments
May. 16, 2023
PDF
- Summary
- The criteria for whether a digital asset is a security are critical to determining the legal jurisdiction of digital assets. Countries with a comprehensive regulatory framework on financial investment instruments, such as the US and South Korea, have announced guidelines for the securities nature of digital assets in a bid to reduce relevant legal uncertainty. It is notable that under the comprehensive regulatory framework, the characteristics of securities should be determined on a case-by-case basis. It seems hard for market participants to predict whether a digital asset is a security, given the lack of precedents regarding the determination of the securities nature.
The Korean government and market participants should consider the following aspects to reduce legal uncertainty and improve predictability regarding the securities nature of digital assets. Digital asset issuers must seek legal advice for whether digital assets are securities when designing digital asset projects, and need to actively make preliminary inquiries (no-action inquiries, etc.) to the supervisory authorities to minimize legal risks. Virtual asset exchanges should clarify the screening standards regarding the securities nature of the virtual assets which are eligible for trading support. Also, it should thoroughly review legal opinions submitted for the screening along with related documents including white papers. When investing in highly speculative altcoins (alternative coins), virtual asset investors should keep in mind legal risks related to the securities nature. The supervisory authorities should actively respond to market participants’ inquiries regarding the securities nature of digital assets. To enhance the legal clarity and predictability on the securities nature issues, they need to rationally institutionalize the process of determining whether a digital asset is a security. Also, they should make more specific the guideline for investment contract analysis of digital assets.
Introduction
The European Union (EU) passed the Regulation on Markets in Crypto-Assets (MiCA) on April 20, 2023. As a legally binding Regulation, not a Directive, MiCA will be directly applicable to 27 EU Member States after a lapse of the legislative grace period. The MiCA legislation seems to signal the beginning of the establishment of the global regulatory framework for the crypto asset market.
The National Assembly of South Korea is also gearing up for the enactment of the virtual asset act focused on unfair trade practices. As part of its efforts, the National Policy Committee voted on the approval of the virtual asset investor protection act on May 11, 2023. The Korean government has taken a two-track legislative approach regarding the digital asset1) regulation. Under the approach, virtual asset transactions will be regulated by the virtual asset act to be enacted, while trading of security tokens will be dealt with through a revision to the Financial Investment Services and Capital Markets Act (the “FSCMA”). The two-track regulatory scheme for security tokens and virtual assets meets global standards and has been adopted by major economies including the EU and US.
The criteria for whether a digital asset is a security are critical to determining the legal jurisdiction of digital assets. Countries with a comprehensive regulatory framework on financial investment instruments, such as the US and South Korea, have announced guidelines for the securities nature of digital assets in a bid to reduce relevant legal uncertainty. It is notable that under the comprehensive regulatory framework, the characteristics of securities should be determined on a case-by-case basis. It seems hard for market participants to predict whether a digital asset is a security, given the lack of precedents regarding the determination of the securities nature. Under these circumstances, digital asset issuers should strive to mitigate the legal risk relating to the securities nature of digital assets to be issued by referring to the guidelines. If it is unclear whether the digital assets are securities, they should make an inquiry to the supervisory authorities to minimize relevant legal risks. Virtual asset service providers should fulfill their duty of care to prevent themselves from dealing with transactions of securities tokens.
This article intends to reduce legal uncertainty relating to the securities nature of digital assets. The major issues of this article include the comprehensive regulatory framework on financial investment instruments under the FSCMA, controversy over the Howey Test, and the interpretation of investment contract securities under the FSCMA. With the analysis of such issues, this article will present implications for participants in Korea’s digital asset markets.
Comprehensive regulatory framework on financial investment instruments under the FSCMA
The FSCMA, which was enacted on August 3, 2007, is characterized by the “transition from listing financial investment instruments to the comprehensive regulatory framework”.2) Securities under the FSCMA consist of five typical types including debt securities, equity securities, beneficiary certificates, derivatives-linked securities and depositary receipts and one comprehensive regulation-based type of investment contract securities. Under Article 4 Paragraph 6 of the FSCMA, the term ‘investment contract securities’ is defined as “instruments bearing the indication of a contractual right under which a specific investor is entitled to the profits earned, or liable for losses sustained, depending upon the results of a joint venture in which the specific investor invests money, etc. jointly with a third person . . . and which is to be run mainly by the third person.” Investment contract securities include various types of investment assets. Under the FSCMA, securities can be regulated based on the substance of the indicated right (functions, risks, etc.), not the formality. Accordingly, securities issued and distributed in a tokenized form within a blockchain network should be governed by the FSCMA.
The comprehensive regulatory framework on financial investment instruments under the FSCMA performs the dual function of facilitating innovation and addressing a regulatory gap. In terms of innovation, the comprehensive regulatory framework enables new types of innovative instruments to be issued and traded without revising relevant rules and regulations. On the regulation front, it plays a role in filling the regulatory void arising from new types of securities.
Under the comprehensive regulatory framework, radical technological innovation may result in the launch of a new investment instrument, which can spark controversy over whether the new instrument is a security. Such controversy is likely to subside as legal precedents accumulate over time. However, amid high legal uncertainty over whether digital assets are considered securities, the procedural legitimacy of digital assets should be reinforced to ensure the issuance and trading of the digital assets. Digital asset issuers can secure procedural legitimacy by making a request for legal interpretation or a no-action letter regarding whether the digital asset to be issued is a security. Korea’s digital asset issuers have not done enough to attain procedural legitimacy of the issuance and trading of the digital assets and to mitigate legal risks arising from their nature of securities.
Controversy over the Howey Test
Although a wide range of digital asset instruments have been rapidly launched, there is a lack of precedents over whether a digital asset falls under the definition of securities. This has intensified legal uncertainty over the comprehensive regulation of digital assets. Under the circumstances, some industry experts are criticizing that the US Securities and Exchange Commission (SEC) has applied the 77-year-old Howey test3) to determine whether digital assets at issue are securities. They argue that the Howey test is neither definite nor appropriate.4) In Korea, digital asset market participants have shown growing interest in the Howey test positively or negatively because the US has the world’s most influential virtual asset market and the test has applied to US major legal cases regarding the securities nature of digital assets including the Ripple XRP case. Furthermore, considering that the FSCMA clause defining investment contract securities originates from the US Howey test,5) it is notable that authoritative interpretation by the US financial authorities and court rulings serve as an important reference for the interpretation of investment contract securities under the FSCMA.
In terms of legislative policy, it may seem reasonable to claim that the US Howey test is too outdated to be applicable to Korea’s digital asset market. But the assertion is unacceptable from the view of legal interpretation of current laws. In contentious legal cases regarding the securities nature of digital assets, the defendants, especially digital asset issuers, respectfully recognized the Howey test as a valid law. They argued that the digital assets in question hardly meet the requirements of the Howey test. In the case of SEC v Ripple, Inc., the defendant states that “Ripple respectfully refers the Court to the case SEC v. W.J. Howey Co., 328 U.S. 293 (1946), for its true and accurate contents.”6)
In the view of legislative policy, the argument for abolishing the Howey test is hardly convincing in that it cannot present specific alternatives. As part of efforts to reduce legal uncertainty over the securities nature of digital assets, a Digital Assets Bill in the US, the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA), proposes a representative legislative alternative assuming digital assets as ancillary assets. However, the RFIA also applies the Howey test to distinguish between ancillary assets and securities.7)
The Howey test serves as a comprehensive regulatory mechanism to protect investors of securities that entail information asymmetry and agency costs. Depending on the economic realities of transactions, the Howey test has been flexibly applied to new types of investment products with a focus on the substance of investment products. One of the cases of modified version of the Howey test is Reves v. Ernst & Young.8) The Reves case adopted the family resemblance test to determine whether a new type of notes were securities. The Ripple XRP case will possibly lead to the development of the Ripple test which will be more aligned with the economic realities of digital asset markets.
Interpretation of investment contract securities under the FSCMA
As for the securities nature of digital assets, the most controversial issue in Korea pertains to whether a digital asset meets the requirements of an investment contract security. The requirements of investment contract securities under the FSCMA are i) common enterprise; ii) investment in money, etc.; iii) the joint business being run mainly by a third party; and iv) the indication of a contractual right under which a specific investor is entitled to the profits earned, or liable for losses sustained.9) Investors of investment contract securities can face a collective action problem, high agency costs, and a wide information gap because they invest in a common enterprise and their profits or losses are generated from the efforts of a third party. In light of these factors, the FSCMA imposes regulations such as mandatory disclosure and prohibition of unfair trading to protect investors.
Korea’s investment contract securities have almost the same requirements as the US Howey test including ‘an investment of money’, ‘in a common enterprise’, and profits ‘derived from the efforts of others’. One major difference in the concept of investment contracts between the US and South Korea lies in the requirement of expectation of profit or right to profit. The Howey test can be met by an investor’s expectation for profits, while Korea’s investment contract securities are underpinned by a contractual right to be vested with profits or losses. Considering that investment contract securities require a contractual right beyond a simple expectation for profits, the definition of investment contract securities under the FSCMA seems to be narrower than the definition by the US Howey test.
Whether digital assets are investment contract securities should be determined based on the comprehensive regulatory principle and textualism. As the concept of investment contract securities is based on the comprehensive regulatory framework, specific facts and economic realities should be thoroughly examined to define digital assets as investment contract securities. In addition, the interpretation of the requirements to be investment contract securities should be focused on the literal meaning of the related provision of the FSCMA. In line with the principle and textualism, it seems unreasonable to argue that “digital assets are not classified as a type of securities if they realize profits without profit distribution (dividends, etc.)”.10) In terms of literal meaning, a requirement regarding ‘a contractual right to be vested with profits or losses’ can be interpreted as a right that confers profits or losses resulting from the efforts of a third party to the owner of relevant securities. Under an investment contract, profits can be paid to investors such as “dividends, other periodic payments, or the increased value of the investment.”11) Accordingly, the right to be vested with profits or losses should not be narrowly interpreted as a right to claim profit distribution. In this respect, it is worth considering the plan for reform on the issuance and distribution regulatory framework for security tokens released by the Financial Services Commission (FSC) of Korea on February 6, 2023. According to the press release regarding the plan, the FSC recognizes the right of share, as well as the right to claim profit distribution, as a type of contractual right to be vested with profits or losses.12) Also, the contractual right includes the formative right13) that can be automatically exercised under a smart contract as well as the right to claim that fundamentally involves a request for an act from the other party. It is undesirable to exclude digital assets taking gains from resale without the right to claim profits from the definition of investment contract securities because economic realities should be considered based on the comprehensive regulatory framework to prevent regulatory evasion. Such exclusion can encourage an attempt to transform profit-sharing digital assets into those taking gains from resale so that related issuers can evade securities regulations. In addition to a requirement associated with the contractual right to be vested with profits or losses, other requirements to be investment contract securities should be considered comprehensively.
Conclusion
As stated above, the comprehensive concept of investment contract securities is of paramount importance in determining whether a digital asset is a security given the reality of the rapidly changing digital asset market. According to the concept, investment contract securities are defined in abstract terms. Whether digital assets are considered securities should be judged on a case-by-case basis by applying the criteria for securities such as the Howey test to specific issues. In a changing economic environment where various financial investment instruments are being launched, the comprehensive regulatory framework is beneficial in filling the gaps in investor protection and putting innovative instruments in the framework of securities regulation. However, the faster the pace of innovation, the greater the atypical feature of digital assets, which may lower the predictability of market participants regarding the characteristics of securities. The Korean government and market participants should consider the following aspects to reduce legal uncertainty and improve predictability regarding the securities nature of digital assets.
Digital asset issuers should design the relevant asset by referring to the guidelines provided by the supervisory authorities. When the controversy over the nature of securities erupts, the issuer who enjoys economic benefits from the issuance bears the primary responsibility. For this reason, the issuer must seek legal advice for whether a digital asset is a security when designing digital asset projects, and need to actively make preliminary inquiries (no-action inquiries, etc.) to the supervisory authorities to minimize legal risks. Virtual asset exchanges should clarify the screening standards regarding the securities nature of the virtual assets which are eligible for trading support. Also, it should thoroughly review legal opinions submitted for the screening along with related documents including white papers.
When investing in highly speculative altcoins (alternative coins), virtual asset investors should keep in mind legal risks related to the securities nature. The supervisory authorities should actively respond to market participants’ inquiries regarding the securities nature of digital assets. To enhance the legal clarity and predictability on the securities nature issues, they need to rationally institutionalize the process of determining whether a digital asset is a security. Also, they should make more specific the guideline for investment contract analysis of digital assets.
1) In this article, the definition of digital assets includes both securities tokens and virtual assets not falling under the securities definition.
2) The Financial Investment Services and Capital Markets Act, August 3, 2007, No. 8635, Grounds for Enactment.
3) SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
4) Yonhap Infomax, February 28, 2023, [IB Story] The reason why digital assets should be integrated into the formal system promptly.
5) The Ministry of Finance and Economy, 2006, Explanatory materials for the enactment of the Financial Investment Services and Capital Markets Act, p. 11.
6) SEC v Ripple, Inc., Answer of Defendant Ripple Labs, INC. to Plaintiff’s Complaint (2021. 1. 29), p. 14.
7) “The Howey test lives on, and it plays a role in determining whether a digital asset is an ancillary asset.” Jones Day, 2022, Digital Assets Defined: How Lummis-Gillibrand Will Shape the Coming Fintech Debate, p. 3.
8) Reves v. Ernst & Young, 494 U.S. 56 (1990)
9) FSCMA §4(6)
10) Busan Ilbo, January 18, 2023, The suspension of transactions on the Busan digital asset exchange can be seen as a signal for business conversion?
11) SEC v. Edwards, 540 U.S. 389 (2004).
12) The Financial Services Commission, February 6, 2023, Appendix: How to overhaul the regulatory scheme for the issuance and distribution of security tokens, p. 7.
13) The formative right refers to a right to create, modify and eliminate legal relationship by a right holder’s unilateral declaration of intention.” Oh, S.K., 2016, Dictionary of Legal Terms, p. 306.
The European Union (EU) passed the Regulation on Markets in Crypto-Assets (MiCA) on April 20, 2023. As a legally binding Regulation, not a Directive, MiCA will be directly applicable to 27 EU Member States after a lapse of the legislative grace period. The MiCA legislation seems to signal the beginning of the establishment of the global regulatory framework for the crypto asset market.
The National Assembly of South Korea is also gearing up for the enactment of the virtual asset act focused on unfair trade practices. As part of its efforts, the National Policy Committee voted on the approval of the virtual asset investor protection act on May 11, 2023. The Korean government has taken a two-track legislative approach regarding the digital asset1) regulation. Under the approach, virtual asset transactions will be regulated by the virtual asset act to be enacted, while trading of security tokens will be dealt with through a revision to the Financial Investment Services and Capital Markets Act (the “FSCMA”). The two-track regulatory scheme for security tokens and virtual assets meets global standards and has been adopted by major economies including the EU and US.
The criteria for whether a digital asset is a security are critical to determining the legal jurisdiction of digital assets. Countries with a comprehensive regulatory framework on financial investment instruments, such as the US and South Korea, have announced guidelines for the securities nature of digital assets in a bid to reduce relevant legal uncertainty. It is notable that under the comprehensive regulatory framework, the characteristics of securities should be determined on a case-by-case basis. It seems hard for market participants to predict whether a digital asset is a security, given the lack of precedents regarding the determination of the securities nature. Under these circumstances, digital asset issuers should strive to mitigate the legal risk relating to the securities nature of digital assets to be issued by referring to the guidelines. If it is unclear whether the digital assets are securities, they should make an inquiry to the supervisory authorities to minimize relevant legal risks. Virtual asset service providers should fulfill their duty of care to prevent themselves from dealing with transactions of securities tokens.
This article intends to reduce legal uncertainty relating to the securities nature of digital assets. The major issues of this article include the comprehensive regulatory framework on financial investment instruments under the FSCMA, controversy over the Howey Test, and the interpretation of investment contract securities under the FSCMA. With the analysis of such issues, this article will present implications for participants in Korea’s digital asset markets.
Comprehensive regulatory framework on financial investment instruments under the FSCMA
The FSCMA, which was enacted on August 3, 2007, is characterized by the “transition from listing financial investment instruments to the comprehensive regulatory framework”.2) Securities under the FSCMA consist of five typical types including debt securities, equity securities, beneficiary certificates, derivatives-linked securities and depositary receipts and one comprehensive regulation-based type of investment contract securities. Under Article 4 Paragraph 6 of the FSCMA, the term ‘investment contract securities’ is defined as “instruments bearing the indication of a contractual right under which a specific investor is entitled to the profits earned, or liable for losses sustained, depending upon the results of a joint venture in which the specific investor invests money, etc. jointly with a third person . . . and which is to be run mainly by the third person.” Investment contract securities include various types of investment assets. Under the FSCMA, securities can be regulated based on the substance of the indicated right (functions, risks, etc.), not the formality. Accordingly, securities issued and distributed in a tokenized form within a blockchain network should be governed by the FSCMA.
The comprehensive regulatory framework on financial investment instruments under the FSCMA performs the dual function of facilitating innovation and addressing a regulatory gap. In terms of innovation, the comprehensive regulatory framework enables new types of innovative instruments to be issued and traded without revising relevant rules and regulations. On the regulation front, it plays a role in filling the regulatory void arising from new types of securities.
Under the comprehensive regulatory framework, radical technological innovation may result in the launch of a new investment instrument, which can spark controversy over whether the new instrument is a security. Such controversy is likely to subside as legal precedents accumulate over time. However, amid high legal uncertainty over whether digital assets are considered securities, the procedural legitimacy of digital assets should be reinforced to ensure the issuance and trading of the digital assets. Digital asset issuers can secure procedural legitimacy by making a request for legal interpretation or a no-action letter regarding whether the digital asset to be issued is a security. Korea’s digital asset issuers have not done enough to attain procedural legitimacy of the issuance and trading of the digital assets and to mitigate legal risks arising from their nature of securities.
Controversy over the Howey Test
Although a wide range of digital asset instruments have been rapidly launched, there is a lack of precedents over whether a digital asset falls under the definition of securities. This has intensified legal uncertainty over the comprehensive regulation of digital assets. Under the circumstances, some industry experts are criticizing that the US Securities and Exchange Commission (SEC) has applied the 77-year-old Howey test3) to determine whether digital assets at issue are securities. They argue that the Howey test is neither definite nor appropriate.4) In Korea, digital asset market participants have shown growing interest in the Howey test positively or negatively because the US has the world’s most influential virtual asset market and the test has applied to US major legal cases regarding the securities nature of digital assets including the Ripple XRP case. Furthermore, considering that the FSCMA clause defining investment contract securities originates from the US Howey test,5) it is notable that authoritative interpretation by the US financial authorities and court rulings serve as an important reference for the interpretation of investment contract securities under the FSCMA.
In terms of legislative policy, it may seem reasonable to claim that the US Howey test is too outdated to be applicable to Korea’s digital asset market. But the assertion is unacceptable from the view of legal interpretation of current laws. In contentious legal cases regarding the securities nature of digital assets, the defendants, especially digital asset issuers, respectfully recognized the Howey test as a valid law. They argued that the digital assets in question hardly meet the requirements of the Howey test. In the case of SEC v Ripple, Inc., the defendant states that “Ripple respectfully refers the Court to the case SEC v. W.J. Howey Co., 328 U.S. 293 (1946), for its true and accurate contents.”6)
In the view of legislative policy, the argument for abolishing the Howey test is hardly convincing in that it cannot present specific alternatives. As part of efforts to reduce legal uncertainty over the securities nature of digital assets, a Digital Assets Bill in the US, the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA), proposes a representative legislative alternative assuming digital assets as ancillary assets. However, the RFIA also applies the Howey test to distinguish between ancillary assets and securities.7)
The Howey test serves as a comprehensive regulatory mechanism to protect investors of securities that entail information asymmetry and agency costs. Depending on the economic realities of transactions, the Howey test has been flexibly applied to new types of investment products with a focus on the substance of investment products. One of the cases of modified version of the Howey test is Reves v. Ernst & Young.8) The Reves case adopted the family resemblance test to determine whether a new type of notes were securities. The Ripple XRP case will possibly lead to the development of the Ripple test which will be more aligned with the economic realities of digital asset markets.
Interpretation of investment contract securities under the FSCMA
As for the securities nature of digital assets, the most controversial issue in Korea pertains to whether a digital asset meets the requirements of an investment contract security. The requirements of investment contract securities under the FSCMA are i) common enterprise; ii) investment in money, etc.; iii) the joint business being run mainly by a third party; and iv) the indication of a contractual right under which a specific investor is entitled to the profits earned, or liable for losses sustained.9) Investors of investment contract securities can face a collective action problem, high agency costs, and a wide information gap because they invest in a common enterprise and their profits or losses are generated from the efforts of a third party. In light of these factors, the FSCMA imposes regulations such as mandatory disclosure and prohibition of unfair trading to protect investors.
Korea’s investment contract securities have almost the same requirements as the US Howey test including ‘an investment of money’, ‘in a common enterprise’, and profits ‘derived from the efforts of others’. One major difference in the concept of investment contracts between the US and South Korea lies in the requirement of expectation of profit or right to profit. The Howey test can be met by an investor’s expectation for profits, while Korea’s investment contract securities are underpinned by a contractual right to be vested with profits or losses. Considering that investment contract securities require a contractual right beyond a simple expectation for profits, the definition of investment contract securities under the FSCMA seems to be narrower than the definition by the US Howey test.
Whether digital assets are investment contract securities should be determined based on the comprehensive regulatory principle and textualism. As the concept of investment contract securities is based on the comprehensive regulatory framework, specific facts and economic realities should be thoroughly examined to define digital assets as investment contract securities. In addition, the interpretation of the requirements to be investment contract securities should be focused on the literal meaning of the related provision of the FSCMA. In line with the principle and textualism, it seems unreasonable to argue that “digital assets are not classified as a type of securities if they realize profits without profit distribution (dividends, etc.)”.10) In terms of literal meaning, a requirement regarding ‘a contractual right to be vested with profits or losses’ can be interpreted as a right that confers profits or losses resulting from the efforts of a third party to the owner of relevant securities. Under an investment contract, profits can be paid to investors such as “dividends, other periodic payments, or the increased value of the investment.”11) Accordingly, the right to be vested with profits or losses should not be narrowly interpreted as a right to claim profit distribution. In this respect, it is worth considering the plan for reform on the issuance and distribution regulatory framework for security tokens released by the Financial Services Commission (FSC) of Korea on February 6, 2023. According to the press release regarding the plan, the FSC recognizes the right of share, as well as the right to claim profit distribution, as a type of contractual right to be vested with profits or losses.12) Also, the contractual right includes the formative right13) that can be automatically exercised under a smart contract as well as the right to claim that fundamentally involves a request for an act from the other party. It is undesirable to exclude digital assets taking gains from resale without the right to claim profits from the definition of investment contract securities because economic realities should be considered based on the comprehensive regulatory framework to prevent regulatory evasion. Such exclusion can encourage an attempt to transform profit-sharing digital assets into those taking gains from resale so that related issuers can evade securities regulations. In addition to a requirement associated with the contractual right to be vested with profits or losses, other requirements to be investment contract securities should be considered comprehensively.
Conclusion
As stated above, the comprehensive concept of investment contract securities is of paramount importance in determining whether a digital asset is a security given the reality of the rapidly changing digital asset market. According to the concept, investment contract securities are defined in abstract terms. Whether digital assets are considered securities should be judged on a case-by-case basis by applying the criteria for securities such as the Howey test to specific issues. In a changing economic environment where various financial investment instruments are being launched, the comprehensive regulatory framework is beneficial in filling the gaps in investor protection and putting innovative instruments in the framework of securities regulation. However, the faster the pace of innovation, the greater the atypical feature of digital assets, which may lower the predictability of market participants regarding the characteristics of securities. The Korean government and market participants should consider the following aspects to reduce legal uncertainty and improve predictability regarding the securities nature of digital assets.
Digital asset issuers should design the relevant asset by referring to the guidelines provided by the supervisory authorities. When the controversy over the nature of securities erupts, the issuer who enjoys economic benefits from the issuance bears the primary responsibility. For this reason, the issuer must seek legal advice for whether a digital asset is a security when designing digital asset projects, and need to actively make preliminary inquiries (no-action inquiries, etc.) to the supervisory authorities to minimize legal risks. Virtual asset exchanges should clarify the screening standards regarding the securities nature of the virtual assets which are eligible for trading support. Also, it should thoroughly review legal opinions submitted for the screening along with related documents including white papers.
When investing in highly speculative altcoins (alternative coins), virtual asset investors should keep in mind legal risks related to the securities nature. The supervisory authorities should actively respond to market participants’ inquiries regarding the securities nature of digital assets. To enhance the legal clarity and predictability on the securities nature issues, they need to rationally institutionalize the process of determining whether a digital asset is a security. Also, they should make more specific the guideline for investment contract analysis of digital assets.
1) In this article, the definition of digital assets includes both securities tokens and virtual assets not falling under the securities definition.
2) The Financial Investment Services and Capital Markets Act, August 3, 2007, No. 8635, Grounds for Enactment.
3) SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
4) Yonhap Infomax, February 28, 2023, [IB Story] The reason why digital assets should be integrated into the formal system promptly.
5) The Ministry of Finance and Economy, 2006, Explanatory materials for the enactment of the Financial Investment Services and Capital Markets Act, p. 11.
6) SEC v Ripple, Inc., Answer of Defendant Ripple Labs, INC. to Plaintiff’s Complaint (2021. 1. 29), p. 14.
7) “The Howey test lives on, and it plays a role in determining whether a digital asset is an ancillary asset.” Jones Day, 2022, Digital Assets Defined: How Lummis-Gillibrand Will Shape the Coming Fintech Debate, p. 3.
8) Reves v. Ernst & Young, 494 U.S. 56 (1990)
9) FSCMA §4(6)
10) Busan Ilbo, January 18, 2023, The suspension of transactions on the Busan digital asset exchange can be seen as a signal for business conversion?
11) SEC v. Edwards, 540 U.S. 389 (2004).
12) The Financial Services Commission, February 6, 2023, Appendix: How to overhaul the regulatory scheme for the issuance and distribution of security tokens, p. 7.
13) The formative right refers to a right to create, modify and eliminate legal relationship by a right holder’s unilateral declaration of intention.” Oh, S.K., 2016, Dictionary of Legal Terms, p. 306.