South Korea: Exploring the New Virtual Asset Accounting and Disclosure Guidelines

South Korea has recently taken a significant step towards enhancing the transparency and accountability of virtual asset issuers and operators.

The country’s financial authorities have approved the ‘Virtual Asset Accounting Supervision Guidelines‘, which provide clear and consistent rules for the accounting and disclosure of virtual assets.

These guidelines apply to all externally audited companies from January 1 and aim to address the confusion and uncertainty that have plagued the virtual asset industry.

What are the Virtual Asset Accounting Supervision Guidelines?

The Virtual Asset Accounting Supervision Guidelines are a set of authoritative interpretations that reasonably apply the current accounting standards (IFRS, etc.) to the specific characteristics of virtual assets.

They are not new accounting standards but rather a way to clarify and harmonize the existing ones. They are mandatory for both companies applying the Korean International Financial Reporting Standards (K-IFRS) and the General Accounting Standards (K-GAAP).

The guidelines cover various aspects of virtual asset accounting, such as:

• The recognition of profits and assets from the issuance and transfer of virtual assets
• The classification and measurement of virtual assets held by companies
• The accounting and disclosure of virtual assets entrusted by customers to virtual asset operators (exchanges)
• The annotation disclosure of the main contents of the white paper, such as the size of virtual asset issuance and performance obligations, the status of internal reservations and free distribution, details of customer consignment virtual asset contracts, storage risks, etc.

The guidelines also specify the conditions and criteria for determining the accounting treatment of virtual assets, such as:

• The fulfillment of all performance obligations stated in the white paper by the issuing company
• The control rights over the virtual assets entrusted by customers to the operators
• The purpose of acquiring the virtual assets and whether they are financial products or not

The guidelines are expected to improve the accuracy and reliability of the accounting information on virtual assets, as they will be verified by external auditors. They will also enhance the comparability and consistency of the financial statements of virtual asset issuers and operators, as they will follow the same rules and standards.

Why are the Virtual Asset Accounting Supervision Guidelines Important?

The guidelines are important for several reasons. First, they reflect virtual assets’ growing recognition and legitimacy as a new form of economic activity and value creation.

South Korea is one of the most active and innovative markets for virtual assets, with a high level of adoption and development. The guidelines show that the country is committed to fostering a healthy and sustainable virtual asset ecosystem by ensuring that the issuers and operators are accountable and transparent to the investors and customers.

Second, they address the challenges and risks that arise from the lack of accounting standards and disclosure practices for virtual assets. The virtual asset industry is still in its infancy, and there are many uncertainties and ambiguities regarding the accounting and reporting of virtual assets. This can lead to confusion, inconsistency, and manipulation of the accounting information, undermining the trust and confidence of the information users.

The guidelines provide a clear and comprehensive framework for the accounting and disclosure of virtual assets, which can reduce the information asymmetry and enhance the protection of the information users.

Third, they set a precedent and a benchmark for other countries and jurisdictions that are considering or developing their own accounting and disclosure rules for virtual assets.

The guidelines are based on the current accounting standards (IFRS, etc.), which are widely adopted and accepted worldwide. They also consider the specific characteristics and challenges of virtual assets, such as their volatility, complexity, and diversity.

The guidelines can serve as a reference and a model for other regulators and standard-setters seeking to establish or improve their own accounting and disclosure regimes for virtual assets.

How do the Virtual Asset Accounting Supervision Guidelines Compare to Other Countries?

They are among the most comprehensive and advanced worldwide, covering a wide range of virtual asset activities and transactions. They also provide detailed and consistent guidance for the accounting and disclosure of virtual assets and reflect the latest developments and trends in the virtual asset industry, such as the emergence of new types of virtual assets and business models.

Other countries and jurisdictions have different approaches and levels of regulation for the accounting and disclosure of virtual assets. Some of them, such as the US, Japan, and Australia, have issued specific accounting standards or guidance for virtual assets. Others, such as the UK, Canada, and Singapore, have adopted a more general or flexible approach. Some of them, such as China, India, and Russia, have not yet issued any accounting or disclosure rules for virtual assets.

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The differences in the accounting and disclosure regimes for virtual assets worldwide can create challenges and opportunities for the virtual asset issuers and operators, as well as the investors and customers.

On the one hand, they can create complexity and inconsistency in the accounting and reporting of virtual assets, which can increase the costs and risks for the information users. On the other hand, they can also create diversity and innovation in the accounting and reporting of virtual assets, enhancing the value and utility of the information users.

What are the Implications and Future Prospects of the Virtual Asset Accounting Supervision Guidelines?

The guidelines are a significant milestone for the virtual asset industry in South Korea and beyond. They represent a positive and proactive response to the growing demand and need for transparency and accountability in the virtual asset ecosystem. They also demonstrate the leadership and vision of the South Korean financial authorities in regulating and developing the virtual asset industry.

They are expected to have various implications and impacts on the virtual asset issuers, operators, investors, and customers.

For the issuers and operators, the guidelines will require them to improve their accounting and disclosure practices and comply with the rules and standards set by the guidelines. This may entail additional costs and efforts, but it may also bring benefits such as enhanced reputation, trust, and competitiveness.

For the investors and customers, the guidelines will provide them with more accurate and reliable information on the virtual assets they are interested in or involved with. This may increase their confidence and satisfaction, but it may also raise their expectations and demands.

They are also likely to influence and shape the future of the virtual asset industry, both in South Korea and globally. The guidelines may encourage more innovation and development in the virtual asset industry, as they provide a clear and supportive regulatory environment for virtual asset issuers and operators.

The guidelines may also foster more collaboration and cooperation in the virtual asset industry, as they create a common and consistent accounting and disclosure framework for the virtual asset issuers and operators. The guidelines may also inspire and motivate other countries and jurisdictions to follow suit and adopt or improve their own accounting and disclosure rules for virtual assets.

How does the National Tax Service’s Decision Affect the Virtual Asset Holders?

Another important development in the regulation of virtual assets in South Korea is the National Tax Service’s decision to exclude the cases where virtual assets are held through non-custodial, decentralized?virtual asset wallets such as cold wallets (offline wallets) from overseas financial account reporting.

This decision was announced on October 30, 2023, as an official interpretation of the law after some confusion and controversy over whether virtual asset wallets created by overseas corporations such as Ledger and Metamask had to be reported.

The National Tax Service explained that overseas business operators only provide programs to store and store personal encryption keys, etc., and do not have control over them, so they are not involved in selling, buying, exchanging, or holding virtual assets in wallets such as cold wallets.

Therefore, holding virtual assets through such wallets does not constitute a foreign financial account and is not subject to reporting pursuant to Article 53 of the ‘Act on International Tax Adjustment’.

This decision applies to cases where virtual assets are held in a personal wallet created through devices provided and sold by an overseas virtual asset wallet business, and the value of the virtual assets exceeds 500 million won.

Starting in 2023, the National Tax Service will include virtual assets as a target for reporting overseas financial accounts, and those holding more than 500 million won will be required to report them to the National Tax Service. However, this requirement will not apply to the virtual assets held in non-custodial, decentralized virtual asset wallets.

This decision has significant implications for the virtual asset holders, as it reduces the regulatory burdens and costs for them. It also recognizes the difference between centralized and decentralized virtual asset wallets and the degree of control and involvement of overseas business operators.

This decision could potentially encourage the use of non-custodial, decentralized virtual asset wallets, as they offer more security, privacy, and autonomy for the users. However, this decision also raises some challenges for the regulators, as it limits their access and oversight of the virtual assets held in such wallets. This decision might also create some inconsistency and complexity in the reporting and taxation of virtual assets, depending on the type and location of the wallets.

How does the Financial Services Commission’s Proposal Affect the Virtual Asset Market?

Another important development in regulating virtual assets in South Korea is the Financial Services Commission’s proposal to amend its credit finance act, which aims to effectively prohibit local citizens from purchasing cryptocurrencies using credit cards.

The regulator said this proposal was announced as a measure to limit the crypto traders from buying crypto on foreign crypto exchanges.

The FSC explained that the main reason for this new amendment is to prevent the illegal outflow of domestic funds, money laundering, and the encouragement of speculative behavior, which pose risks to the financial stability and security of the country. The FSC also noted that using credit cards to purchase cryptocurrencies is not common in South Korea, as most transactions are done through bank accounts or prepaid cards.

The proposal plans to collect public feedback on the amendment until February 13. According to Yonhap News Agency, it is expected to be reviewed and voted on with the aim of implementation in the first half of 2024.

This proposal by the FSC has significant implications for the virtual asset market, especially for cross-border transactions and exchanges. By prohibiting the use of credit cards to purchase cryptocurrencies, the FSC intends to reduce the demand and supply of foreign cryptocurrencies in the domestic market and discourage traders from using foreign platforms that may have lower regulatory standards or higher risks.

However, this proposal may also have unintended consequences, such as driving the traders to use alternative methods or channels to access foreign cryptocurrencies, such as peer-to-peer platforms, decentralized exchanges, or offshore accounts.

The FSC’s proposal also reflects the increasing scrutiny and regulation of the virtual asset market by the South Korean authorities, who are trying to balance the promotion and protection of the virtual asset industry.

The proposal follows the recent enactment of the ‘Act on Reporting and Using Specified Financial Transaction Information’, which requires the virtual asset operators to register and comply with the anti-money laundering and customer protection rules. The proposal also precedes the planned introduction of the capital gains tax on virtual asset income, which is scheduled to take effect from January 1, 2025.

Their proposal is another example of how South Korea is leading and pioneering in regulating and developing the virtual asset industry. It shows that the country is concerned not only with the accounting and disclosure of virtual assets but also with the taxation and reporting of virtual assets. It also shows that the country is willing and able to adapt and respond to the changing and evolving nature of virtual assets and to balance the needs and interests of the various stakeholders in the virtual asset ecosystem.

The Bottom Line

The Virtual Asset Accounting Supervision Guidelines are not the end but the beginning of a new era for the virtual asset industry. They are a dynamic and evolving document that will be updated and revised as the virtual asset industry grows.

The South Korean regime is comprehensive. I have also briefly covered tax reporting, which works hand in hand with the accounting supervision guidelines. To close up the loop, there is also a proposed amendment to their Credit Finance Act. It proposes to ban local citizens from using credit cards to purchase cryptocurrencies, with concerns over illegal outflows of funds and money laundering and encouraging speculation leading to the decision, with the goal of implementation in the first half of 2024. Both inflows and outflows are taken into consideration. I would expect to see tougher rules for projects and also exchanges in months to come.

They are also a challenge and an opportunity which will test and reveal the potential and performance of the virtual asset industry. They are, above all, a sign and a symbol which show that the virtual asset industry is maturing and advancing and that South Korea is leading and pioneering in this field.