South Korea’s financial authorities have embarked on a process to classify nearly 600 digital coins traded in the country into three categories to regulate them with different laws.

The Financial Services Commission (FSC) is likely to benchmark the rules of the United Kingdom’s Financial Conduct Authority (FCA) and the European Union (EU)’s Markets In Crypto-Assets Regulation (MICA) to categorize digital coins into three types – exchange tokens, security tokens and utility tokens. An official from the FSC said the classification is necessary as different products need different regulations.

According to the Korea Capital Market Institute, exchange tokens are the most popular forms of crypto-assets that are intended to be used as a method of payment. They include coins like Bitcoin and Ethereum.

Security tokens operate as substitutes for the traditional securities such as stocks and bonds. Utility tokens are digital assets used in applications or services based on blockchain technology.

The financial authorities are trying to divide digital assets into three categories to put them under different regulatory realms. For instance, security tokens can be regulated by the capital market act that would require a coin issuer to undergo the FSC review to raise capital from more than 50 investors. If the investment pool exceeds 1 billion won ($872,676), the issuer must submit a registration of securities.

Utility tokens are unregulated in the U.K. because they are treated as blockchain-based points that customers can earn as part of loyalty programs. But if they are electronic-money (e-money) tokens that are used as a means of payment and exchange in digital services, they can be regulated with the Electronic Financial Transaction Act. Stable coins fall under the category of e-money tokens.

But in order to regulate exchange tokens like Bitcoin, the government may need to come up with new rules because they are traded using distributed ledger technology like blockchain and not backed by brokerages. There is no current law that can govern the trading of exchange coins.

By Lee Sae-ha and Choi Mira

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]