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South Korean Regulator Excludes Certain NFTs From Crypto Regulations

The FSC released detailed guidelines clarifying the conditions under which non-fungible tokens (NFTs) are considered virtual assets. The guidelines differentiate certain types of NFTs from virtual assets based on their usage, characteristics, and the minimal risk they pose of widespread user harm.

The guidelines were released on Monday, following the enactment of the Enforcement Decree, which specifies the details of the Virtual Asset User Protection Act promulgated on July 18, 2023, and scheduled to take effect on July 19, 2024.

This regulatory update and its implications are specific to South Korea, under the jurisdiction of the FSC. The FSC’s guidelines state that NFTs primarily intended for collection, facilitating transactions, or that are unique and irreplaceable, such as proof of authenticity tokens in the art market or property transaction records, are not classified as virtual assets. However, if NFTs function similarly to virtual assets, they will be subject to the “Virtual Asset User Protection Act” and other relevant regulations. The Enforcement Decree associated with this act details the management of virtual assets, including user deposit safety, the mandatory use of cold wallets for asset storage, and requirements for insurance or reserves to cover incident liabilities.

The FSC’s guidelines aim to provide clarity and ensure regulatory compliance as the market for digital assets, including NFTs, grows. By distinguishing certain NFTs from virtual assets based on their function and risk level, the FSC seeks to foster a safer and more orderly digital asset market. The distinctions made are intended to prevent misuse of the asset class and protect users from potential market abuses. This move reflects a growing trend among global regulators to more precisely define and manage digital assets, acknowledging their expanding role in the economy while addressing associated risks. The decision to assess NFTs on a case-by-case basis underscores the complexity of digital assets and the nuanced approach required for effective regulation.

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