[Column] The Era of Code Replacing Asset Management Firms... Where Are Korean Regulations?

Kim Hyobong's Legal Crypto is a column that discusses domestic and international legal frameworks and policy trends related to digital assets. Experts, including Kim Hyobong, a lawyer at the law firm Bae, Kim & Lee, CPA Choi Hee-kyung, and lawyer Woo Ji-won, share the latest regulatory developments in digital assets.

The evolution of virtual assets (digital assets) has become frighteningly rapid. When financial investment products were tokenized and placed on the blockchain, it was anticipated that expansion would be difficult due to the securities law regulations of each jurisdiction.

However, shortly after, decentralized exchanges (DEX), which are decentralized trading platforms, emerged, and non-custodial wallets that connect DEX and users without holding user assets quickly infiltrated everyday life.

It seemed that trading financial investment products without exchanges and securities firms had become possible, but now, vaults have appeared that automatically manage and reinvest my assets according to predetermined protocols without the need for an asset management firm. In this way, code has replaced exchanges, securities firms, and even asset management firms.

A vault is a smart contract that pools the digital assets of multiple users to generate profits according to pre-coded strategies. When a user deposits their assets into a vault, the vault issues receipt tokens (Receipt tokens or Vault tokens) proportional to the depositor's share in the pool. If the vault generates profits and the total value of the pooled assets increases, the value of the receipt tokens also rises accordingly.

The vault automatically claims rewards from investments on behalf of the entire pool, reinvesting the received rewards back into the original deposited assets, and also pays network fees incurred during bulk transactions on behalf of the entire pool.

The asset management strategies employed by vaults are diverse, including depositing funds into lending protocols like Aave to receive interest, or providing liquidity to DEX to earn trading fees. Tokens received through staking can be reused for lending or liquidity provision to generate double profits, or assets can be borrowed against collateral to maximize profits through leverage. The so-called delta-neutral strategy, which generates profits while hedging against price volatility, can also be implemented through vaults.

The person who sets the strategy for the vault is called a curator, who defines the market scope accessible to the vault and establishes or adjusts the asset allocation strategy. In contrast, a deployer is someone who simply builds and deploys the vault contract without determining the asset allocation strategy, and the two are clearly distinguished in terms of operational discretion.

If a specific vault contract is designed to continuously change and adjust strategies by the curator to optimize profits, it is likely to be subject to securities regulations due to the managerial efforts of the curator. However, if the vault allocates assets solely based on predetermined fixed logic or logic determined by users, it is less likely to be subject to securities law as a simple code performing ministerial functions.

Hester M. Pierce, a commissioner of the U.S. Securities and Exchange Commission (SEC), stated in a press release on July 22 that "vaults span a wide spectrum from programmatic allocations entirely determined by immutable smart contracts to allocations at the discretion of other individuals or groups, and the functions and strategies used in vaults are diverse and rapidly evolving."

She also advised that "parties managing strategies related to vaults, such as interest rate settings, selection of lendable assets, loan-to-value (LTV) ratio settings, and liquidation criteria, should analyze whether their activities violate federal securities laws," requesting opinions and further discussions from industry experts involved in the design and operation of vaults. This reflects the SEC's position to closely collaborate with the industry to understand the rapidly changing landscape of the digital asset market and to establish appropriate regulations in a timely manner.

Domestic legislative discussions have yet to move beyond the early market model focused on exchanges and custodians, while the global market is changing rapidly. The demand for utilizing digital assets continues to expand, primarily driven not by speculative demand for altcoins (virtual assets other than Bitcoin) but by investment demand for financial investment products.

Even if such services are banned domestically, users can still manage funds in DeFi (Decentralized Finance) through personal wallets and vaults, making capital outflows and the contraction of the domestic financial industry inevitable. It is crucial to publicly disclose clear regulatory proposals, derive optimal regulations through open discussions with industry experts, and swiftly establish a blueprint for the domestic digital asset industry, as this is vital not only for the digital asset sector but also for the continuous development of the financial industry.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.