Seoul Economic Daily ~ News Directory 3

As the United States Securities and Exchange Commission (SEC) recognizes the securities properties of Terra and Luna, the possibility that a number of ‘altcoins’ other than Bitcoin will be recognized in Korea has increased. Financial authorities still take a principled position to draw conclusions after carefully looking at foreign cases, but the cryptocurrency industry is well aware of the SEC’s ruling. Industry watchers worry that if the securities properties of cryptocurrencies are widely recognized, cryptocurrencies in Korea will come under strong regulations under the Capital Markets Act, which could harm innovation and lead to the shrinking of related industries such as exchanges.

According to the legal community on the 19th, the SEC filed a complaint with the Federal District Court of New York on the 16th of this month (local time) against Terraform Labs, the publisher of Terra and Luna, and Dohyeong Kwon, a fellow the founder company, on charges of fraud under the Securities and Exchange Act. The SEC claimed that investors suffered losses of at least 40 billion dollars (about 52 trillion won) because of the ‘bearer securities’ sold by Mr Kwon.

What is worth noting is that the SEC sees Terra and Luna as ‘bearer securities’ and concluded that these cryptocurrencies have the property of securities. The SEC said, “The defendants offered and sold ‘crypto asset securities’ to investors without registering with the SEC.” It was offered and sold to unregistered investors.” The SEC made a case based on the fact that ‘securities’ as defined by the US Federal Securities Act are recognized as a wide range of investment instruments, including investment contracts, and that US courts and Congress are also recognize them.

Based on the ‘Howey Test’, which is a criterion for the application of the Securities Act, the SEC concluded that △LUNA △Tera USD △wLUNA, a wrapper token linked to the value of Luna △Mirror Protocol (MIR), etc. have securities properties. It is said that money was actually invested in these cryptocurrencies, there was mutual business, and the expectation that investment returns could be obtained according to business performance was valid. Earlier, the SEC has been actively expanding the scope of ‘securities’ by recognizing the securities properties of Binance Stablecoin (BUSD) following Ripple (XRP) and Rally (RLY).

As the SEC interpreted Luna and others as ‘investment contract securities’, domestic financial authorities also ran into trouble. The Financial Supervision Service has also recently formed a ‘Task Force (TF) to support the determination of the securities properties of virtual assets’ and reviews the securities properties of domestic cryptocurrencies, because foreign cases will be an important basis. An official from the Financial Supervisory Service explained, “Since the TF has just started, we have not started a detailed review,” but “however, we will of course refer to foreign cases.”

In addition, the SEC’s decision could also affect Kwon’s pending case in Korea. Korean prosecutors requested an arrest warrant for Kwon and others on charges of violating the Capital Markets Act in October last year, but the court rejected the request, saying, “There is no clear data on whether the two coins are securities.” As the SEC, a quasi-judicial body in the United States, concluded that ‘Luna and Terra are securities’, the basis for a judgment has been prepared in the domestic court. Jung Jae-wook, a partner at Juwon Law Firm, pointed out, “(SEC’s case) will be favorable to the prosecution, but it seems that the basis of the SEC’s decision on the nature of securities will have some influence in Korea.” Another official from the legal profession also said, “At the time, there was no precedent for the court to recognize the nature of the securities of a particular coin, so it must have been a conservative approach.” It means we have a basis for identifying the alleged breach of the law.”

If domestic financial authorities recognize the securities nature of these cryptocurrencies in the future, cryptocurrency exchanges such as Upbit and Bithumb, which do not qualify for securities trading and brokerage under the Capital Markets Act, could suffer a major blow to their operations. This is because if a large number of altcoins are deemed to be ‘securities’, these digital currencies must be removed en masse from the exchange. In addition, there are concerns that cryptocurrency issuers will also be placed under strict regulations under the Capital Markets Act, which could stifle innovation and creativity in the cryptocurrency industry. “Cryptocurrencies that claim to be ‘utility coins’ because they are used within a specific ecosystem such as Wemix and do not have securities properties will also be affected,” said lawyer partner Kwangya Yejaseon Law Firm . If so, this may also fall under the Capital Markets act as investment contract securities.”

However, given the SEC’s ruling criteria, the industry predicts that Bitcoin, the world’s no. This is because the publisher is not exactly known, and it is only published through mining. However, it is analyzed that Ethereum, which is second in market cap, is very likely to be classified as a security by the US financial authorities as it changes its block prevention method, which is mining (proof of work, PoW) like Bitcoin , to holdings (proof of stake, PoS) in September last year.