Basic Digital Asset Act to include 'no-fault compensation · blocking stablecoin insolvency'… government draft likely to carry over into next year

The Basic Digital Asset Act (phase two virtual asset legislation) that the government is preparing is expected to include measures that strengthen protection for digital asset investors. Key elements include imposing no-fault liability for damages on digital asset service providers and measures to separate the insolvency risk of stablecoin issuers from investors.

On the 30th, according to the financial sector and the National Assembly, the government draft of the Basic Digital Asset Act under review by the Financial Services Commission is likely to include provisions requiring stablecoin issuers to manage reserve assets as safe assets such as deposits or government bonds, and to deposit or place at least 100% of issuance balances with custodians such as banks or to put them in trust. This is intended to prevent the issuer's insolvency risk from being directly transferred to investors.

Regulatory standards for digital asset service providers are also expected to be significantly strengthened compared to before. Obligations to explain products and regulations on terms and advertising will be applied at levels comparable to the financial industry, and a plan to impose no-fault liability for damages by applying the Electronic Financial Transactions Act in cases of incidents such as hacking or system failures is under consideration.

It is also reported that the draft will include a plan to allow the domestic sale of digital assets on the premise of sufficient information disclosure. The intent is to improve the practice that, since 2017, has seen initial coin offerings (ICOs) prohibited by administrative guidance domestically, leading to overseas issuance followed by indirect domestic listings.

However, although the overall framework of the bill has been set, observations suggest that the submission of the government draft is likely to be pushed into next year as differences among relevant agencies over key issues have not yet been resolved. The biggest point of contention is the difference in positions regarding the entities that would issue stablecoins.

The Bank of Korea's position is that only consortia in which banks hold at least 51% of the shares should be allowed to issue stablecoins, citing financial stability and regulatory compliance capacity. By contrast, the Financial Services Commission is reported to be negative about fixing a bank-share requirement in law, saying that it is necessary to broaden the participation of technology companies for innovation.

Opinions also differ over the policy consultative structure that would handle stablecoin authorization and regulation. The Bank of Korea advocates forming a consensus body in which related agencies decide unanimously, while the Financial Services Commission's position is that a separate body is unnecessary because there already exists a collegial administrative organization that includes the Bank of Korea and the Ministry of Economy and Finance.

Other issues remaining to be sorted include what level to set for the minimum capital requirement of stablecoin issuers and whether to separate exchanges' issuance and distribution functions.

A Financial Services Commission official said, "It is a process of narrowing differences among the positions of relevant agencies," adding, "All possibilities are being kept open and discussions are ongoing." As the submission of the government draft has been delayed, it is reported that the ruling party's digital asset task force (TF) is also considering preparing a separate draft based on an existing member-submitted bill.