FSC Releases New Guidelines for NFT Classification
The Financial Services Commission (FSC), South Korea's top financial regulator, has recently unveiled comprehensive guidelines to determine when non-fungible tokens (NFTs) should be classified as virtual assets.
NFTs are unique digital assets issued in limited quantities and primarily used for collecting content like videos and images. Due to their characteristic of being held by a select few individuals with limited secondary market transactions, the FSC believes that the risk of widespread user harm is low, distinguishing NFTs from other virtual assets.
The FSC specified that NFTs will not be classified as virtual assets under the Enforcement Decree if they serve purposes such as collecting, facilitating transactions, or are one-of-a-kind and irreplaceable. Examples of such NFTs include tokens verifying authenticity in the art market, records of property transactions, and tokens used for supply chain verification. However, if an NFT functions as a virtual asset, it will be subject to the provisions of the Virtual Asset User Protection Act and other relevant regulations.
The Enforcement Decree was established to provide detailed guidelines for the Virtual Asset User Protection Act, which was enacted on July 18, 2023, and is set to come into effect on July 19, 2024. The act aims to protect virtual asset users and ensure market stability through measures such as defining virtual assets, requiring secure storage of user deposits and virtual assets, and penalizing unfair trading practices. The decree outlines exclusions from the virtual asset category, management of user deposits, mandatory use of cold wallets for asset storage, and insurance or reserve requirements for incidents of liability.
The FSC stressed that the classification of NFTs should be based on their actual function and characteristics rather than their name or underlying technology. Anyone involved in issuing, distributing, or handling NFTs should thoroughly evaluate factors like issuance and distribution structure, terms and conditions, advertising, and business content.
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