South Korea to classify some NFTs as Virtual Assets ahead of new crypto regulations

South Korea’s Financial Services Commission (FSC) is changing its stance regarding nonfungible tokens (NFTs), looking to classify some of them as Virtual assets.

NFTs are primarily unique assets that cannot be replicated, traits that differentiate them from cryptocurrencies would be treated as virtual assets, a June 10 report by South Korea’s FSC noted.

Specifically, the report that NFTs are divisible, can be produced in masses, or can be used as a means of payment, all of which are now classified under South Korea’s newest framework.

Businesses that issue NFTs classified as virtual assets are now obliged to report it to the South Korean watchdog.

The new directive comes ahead of the nation’s first crypto regulatory framework set to be implemented on July 19.

According to Jeon Yo-seop, the FSC’s Financial Innovation Planning head,  NFT collections minted in huge quantities are most likely to be used as payment.

As an example, the official stated that if one million NFTs were issued in a collection, they could be traded and used as payment, just like cryptocurrencies.

He suggested that there wouldn’t be one single standard to classify NFTs as virtual assets. Rather, the FSC will make the distinction via a case-by-case review approach.

Further, if an NFT possesses characteristics of financial security as detailed in the country’s Capital Markets Act, they may be classified as securities.

With the implementation of the new guidelines, some NFTs may even be eligible to receive interest when deposited in an exchange. This is per a notice from the FSC, issued late last year, that mandates virtual assets deposited on crypto exchanges to be eligible for interest generation.

However, regular NFTs and CBDCs are excluded from this benefit.

The new framework is a part of South Korea’s crypto legislation dubbed the Virtual Asset User Protection Act. Set to come into force a week later, it seeks to criminalize malpractices such as using undisclosed information for crypto investments, manipulating market prices, and engaging in fraudulent transactions.

The bill was passed in 2023 by the nation’s National Assembly. Cryptocurrency-focused entities were subsequently given a one-year grace period to comply with the regulations.

To complement these efforts, South Korean regulators have also launched a crypto crimes unit. Dubbed the Joint Virtual Asset Crime Investigation Unit, the entity comprised 30 experts from seven national agencies.