SOUTH KOREA Law and Practice Contributed by: Wooyoung Choi, Suhhee Han, Seonghwan Ju and Matt Younghoon Mok, Lee & Ko
licensed entity, and the external firms do not them- selves substantively perform regulated activities, sep- arate VASP registration by the external firms would generally not be required.
tions (DAOs). In this regard, Korean financial authori- ties have taken the position that, in the case of fully decentralised DeFi services, it is difficult to identify a responsible operating entity, making the applicable regulatory framework unclear. In addition, regulators appear to view DAOs as organisational structures whose legal form and governance rights are not cur- rently reflected in Korea’s Civil Act or Commercial Act. Meanwhile, quite a lot of corporations, including stock companies, have developed and operated DeFi-relat- ed services. In many such cases, however, the servic- es would likely not be regarded as fully decentralised DeFi. Although certain operational functions may have been implemented through smart contracts, the rel- evant corporations generally remained responsible for development, commercialisation, incentive structures, branding, and overall project management. Since there are currently no dedicated regulations specifically applicable to DeFi, the legal requirements applicable to a particular DeFi arrangement are gener- ally determined based on the specific structure and characteristics of the relevant business model under existing legal and regulatory frameworks. 5.3 Liability Although there have not been many publicly confirmed cases involving damage arising specifically from DeFi services in Korea, there is currently no dedicated legal framework governing DeFi. As a result, liability relat- ing to DeFi services appears to be assessed under existing legal frameworks, with responsibility poten- tially imposed on the operators or developers of the relevant services. Kronos DAO (2022) Kronos DAO, a DeFi project operating on the Klaytn blockchain, withdrew funds from a DAO wallet without prior notice and exchanged them for its self-issued stablecoin. However, prosecutors declined to indict, reportedly on the grounds that there was no clearly established legal duty to provide prior notice and that intentional misconduct relating to the loss of funds could not be sufficiently proven.
5. Decentralised Finance 5.1 Ability to Use DeFi
Korean financial authorities recognise that “fully decentralised DeFi services” present regulatory chal- lenges because it is difficult to identify a responsible operating entity and determine the applicable legal jurisdiction. The authorities have indicated that they intend to continue developing an appropriate regula- tory framework for such services. As of now, however, no relevant regulations exist in Korea expressly pro- hibiting fully decentralised DeFi services. That said, where a DeFi arrangement is not truly decentralised and a specific operator effectively retains control over the platform or service, such operator may be deemed to be conducting a virtual asset business and therefore become subject to the Act on Reporting and Using Specified Financial Transaction Information and the Act on the Protection of Virtual Asset Users. Meanwhile, no such regulation expressly prohibits centralised finance (CeFi) companies from utilising DeFi protocols. However, in practice, there are sig- nificant compliance constraints. In particular, VASPs are required to: • comply with the Travel Rule by collecting, transmit- ting, and retaining sender and recipient information for virtual asset transfers exceeding KRW1 million; • maintain virtual assets of the same type and quan- tity as those entrusted by users; and • securely store at least 80% of users’ virtual assets in cold wallets segregated from internet-connected systems. These obligations may create practical difficulties for VASPs seeking to utilise DeFi protocols. 5.2 DeFi Structures In Korea, there are currently no specific laws or regula- tions governing organisational structures for operating DeFi services or decentralised autonomous organisa-
582 CHAMBERS.COM
Powered by FlippingBook