Korea’s Democratic party fast-tracks phase 2 crypto legislation

The Democratic Party of South Korea has proposed tabling the Virtual Asset Phase 2 Act ahead of the Lunar New Year, aiming to regulate stablecoins and shareholder limits. Several regulatory debates have arisen since the Framework Act on Digital Assets was introduced over whether banks or tech firms should issue South Korean won-backed stablecoins.

The debate is also focused on whether limiting the ownership of major shareholders in digital asset exchanges to the proposed 15%-20% is appropriate. The South Korean Democratic Party is also proposing that stablecoin issuers should hold a minimum capital of ~$3.46 million (5B Won).

However, South Korea’s industry insiders are concerned that legislation could be delayed if the disagreement rages on, according to local media. They also fear that further delays to the legislation could lead to the South Korean financial markets falling behind global trends.

Meanwhile, ongoing talks about the won-pegged stablecoin issuer have stalled. Representative Ahn Do-geol, a member of the Digital Assets Task Force, disclosed that opinions are split on the proposed shareholding structure regarding whether banks should have a 50% + 1 share of the won-backed stablecoin issuance sector. 

Bank of Korea argues that banks should hold majority stake

The Bank of Korea (BoK) has expressed concerns about maintaining the effectiveness of monetary policy and protecting investors, arguing that banks should hold a majority share and steer issuance. However, the South Korean Financial Services Commission (FSC) believes that allowing private tech companies to issue stablecoins would facilitate faster market entry and ecosystem expansion. The prolonged stalemate has led to several delays in the proposed legislation originally planned for 2025.

Adding to the confusion, South Korea’s industry insiders are reportedly opposed to banks controlling stablecoin issuance, arguing that the won-backed tokens will be more like new-concept deposit products than stablecoins. They believe this will not align with global market trends and may lead to a complete stagnation of stablecoin issuance.  

In particular, South Korean industry insiders note that no other country in the world requires a majority stake in any industry, including banking. They cited countries such as Singapore, the U.S., Japan, and many in Europe that have established regulations allowing government-approved private companies to issue stablecoins alongside banks.

Meanwhile, South Korea’s People Power Party (PPP) has also opposed the SK FSC’s proposal to limit stakes for major crypto exchange shareholders. The PPP argues that limiting these stakes could lead to increased capital flight and confusion.

South Korea’s FSC chair says regulating ownership is necessary 

The SK FSC chairman, Lee Eok-won, recently stated that regulating the ownership of major digital asset exchanges is both necessary and efficient, considering the public infrastructure nature of exchanges. However, one digital asset industry insider noted that the process of major shareholders selling their shares and restructuring corporate governance could take months or even years. It is questionable whether these steps will truly refresh the South Korean digital asset market.

Meanwhile, the BoK is looking into implementing a registration system for domestic institutions to issue won-pegged stablecoins. However, South Korea’s central bank has expressed concerns that won-backed stablecoins could bypass capital controls. 

On the other hand, South Korean regulators are also divided on stablecoin issuance rules. Media reports suggest that external trade threats and exchange rate fluctuations have further escalated tensions. However, the South Korean digital asset market is gaining momentum despite these regulatory challenges. The SK market has also grown exponentially following the recent introduction of KRW-backed stablecoin projects and the legalization of corporate crypto trading.

In the meantime, Korea Digital Asset has partnered with privacy-focused blockchain project Miden to advance crypto infrastructure for institutional adoption in South Korea. The initiative is expected to prioritize regulatory compliance and adherence to South Korean industry standards. The collaboration further seeks to promote the regulated and secure use of digital assets within institutional settings.

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