Legal Update: Cryptocurrency Exchanges in Korea

Many Koreans are proud of their most developed Internet infrastructure and the fastest broadband speed in the world. When it comes to blockchain in Korea, however, it is often associated with cryptocurrency as a gambling tool as opposed to the next generation of the Internet. This article will provide the recent legal developments in Korea with respect to the government’s response to the emergence of the new technology and its impact on the society.

New Industrial Classification for Blockchain Technology

By way of its Notification which took effect on September 1, 2018, the Statistics Korea has added ten (10) new blockchain technology-related industries to the Korea Standard Industrial Classification (“KSIC”). The purpose was, among other things, to have such industries specified in the KSIC so that the government can implement and support its policies related to blockchain technologies. As further explained below, the Blockchain-based Crypto Asset Trading & Brokerage Business (i.e., cyrtocurrency exchanges, “BCATBB”) is one of the new blockchain technology-related industries listed under the KSIC.

Tax Credit for Cyrtocurrency Exchanges

On August 30, 2018, the government submitted to the National Assembly an amendment bill to the Restriction of Special Taxation Act (“RSTA”). The amendment bill specifically excludes the BCATBB from the 31 categories of small and medium-sized startup businesses and the 46 categories of small and medium-sized businesses that qualify for tax credit at the rate of 50 to 100% and 5 to 30%, respectively. The reasoning behind the proposed amendment is believed to be that in the government’s view the cryptocurrency trading and brokerage business is not adding value to the society to justify the tax credit.

If the amendment bill is passed by the National Assembly without any change, the amended law will apply to the fiscal years starting on and after January 1, 2019. Many cryptocurrency exchanges in Korea have flourished in recent years and fully enjoyed the tax credit under the RSTA (mostly at a rate of 50%). But starting from the next year, they may face a significant impact on their bottom line due to the likely discontinuance of the tax credit.

Qualification as Venture Business for Cyrtocurrency Exchanges

From August 10 to September 4, 2018, the Ministry of SMEs and Startups put a public notice of its proposal to amend the Enforcement Decree to the Act on Special Measures for the Promotion of Venture Businesses (“ED-ASMPVB”). The proposed amendment adds the BCATBB to the list of the businesses excluded from qualifying as a venture business under the ASMPVB. If the proposal comes into force without any change, those “venture” cryptocurrency exchanges would be revoked from the status as venture business and lose all the benefits that venture businesses are entitled to. Those benefits include, among many things, (i) in-kinds contributions of patents, utility model rights, and industrial design rights, (ii) 50% tax credit for a period of five years, (iii) 75% exemption of the tax on acquisition of business property for a period of four years, and (iv) certain relaxed requirements for listing on the Korea Exchange (KOSDAQ).

Some members of the public have been reported to voice strong oppositions to the proposed amendment to the ED-ASMPVB. In particular, the three most active blockchain industry associations put out a joint announcement requesting the government to carefully reconsider the proposed amendment.

Special Zone for Cryptocurrency Exchanges

In the midst of the policy debates, Jeju Island Governor Hee-Ryong Won has promised on numerous occasions that his Special Self-governing Province will guarantee the vitalization of the cryptocurrency exchange industry within the territory of the island. The autonomous government of the famous vacation destination in Korea was founded by the Special Act on the Establishment of Jeju Special Self-governing Province and the Development of the Free International City (“Special Act”). Governor Won has claimed that Jeju Isalnd will implement reasonable regulations and standards applicable to the cryptocurrency and blockchain businesses in the island. His collaboration with the central government will continue as part of the efforts to amend the Special Act to the extent that Jeju Island is designated as the special zone for the cryptocurrency and blockchain businesses.