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South Korea to launch a separate market for digital securities in 2022

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(Kitco News) - South Korea continues to be a hub for cryptocurrency-related developments as the country's top financial regulator, the Financial Services Commission (FSC), announced on Tuesday that it plans to open a separate digital securities market in a move to institutionalize and promote cryptocurrencies. 

The plan emerged from an FSC report containing the results of a joint policy seminar that was attended by the Financial Supervisory Service, Korea Exchange, Korea Securities Depository and Capital Market Research Institute on Sep. 6.

The need for a separate market for digital securities arose from the fact that the country's current capital market and electronic securities systems don't include any legal definitions for non-standardized securities issued on the blockchain. Due to this, the FSC determined that separate guidelines were needed to "support the sound development of the market and industry."

According to the new guidelines, which are expected to be announced in Q4 2022, tokens will be required to be registered as electronic securities, at which point they will be able to list on the new digital securities market. 

Korea Exchange (KRX) has been identified as the platform that will operate the digital securities market while security companies will broker the trades. The new proposal also calls for the Korea Securities Depository to review and register the listing of security token applications submitted by the issuer or through a brokerage. 

To help protect investors, tokens are to be distributed in the same manner as existing securities, and over-the-counter transactions will only be allowed on a limited scale in the early stages of the market. 

Think tank warns of the dangers posed to South Korea's financial system

While the new crypto developments have the full support of South Korea's new government, the Korea Institute of Finance has warned that the growing crypto scene could one day threaten the country's financial well-being due to the industry's increasing ties to traditional finance. 

A report released by the Seoul-based independent research institute suggested that the crypto sector currently has "minimal" influence on the country's financial markets, but that could soon change as cryptocurrencies grow in popularity and adoption. 

"Considering [South Korea's] increased exposure [to crypto] and relevant criminal cases, virtual assets can become a major threat to financial stability," the report said. 

Bank of Korea calls to end the country's ICOs ban to promote innovation

According to a report released by the country's Financial Intelligence Unit (KoFIU), Korea's crypto market saw an average daily trading volume of 11.3 trillion Korean won (US$8.2 billion) in 2021 as compared to an average daily trading volume of 15.4 trillion won at the KOSPI, the country's main stock index.

These stats are expected to increase as the number of crypto users in Korea continues to rise. Data shows that the cohort of active crypto users has grown from 1.21 million in 2020 to 5.58 million users by the end of 2021, representing more than 10% of the country's total population.

The report suggested that financial institutions with increased exposure to crypto will see higher volatility in their profits, which could possibly damage the institution's reputation and asset soundness. 

Local laws mandate that crypto exchanges in the country, also known as virtual assets service providers (VASPs), are required to establish partnerships with regulated banks to issue customers real-name deposit and withdrawal accounts. 

Overall, the KoFIU warned that price volatility, coupled with tech and operational risks, could undermine trust in banks tied to VASPs and result in shockwaves that spread across stocks, bonds and foreign exchange markets.

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