CONTENTS
- 1. Fintech Regulation | Statutory Structure and the Regulatory Environment
- - Payment Settlement and Electronic Finance Area
- - Investment, Securities, and Virtual Asset Area
- - Financial Regulatory Exception System
- 2. Fintech Regulation | The Points Where Regulatory Risk Arises
- - Legal Risk Structure of Supervision and Sanctions
- 3. Fintech Regulation | Structure and Key Issues of the Financial Regulatory Sandbox
- - Legal Issues of Innovative Financial Service Designation
- - Points to Note When Using a Regulatory Exception
- 4. Fintech Regulation | Response Strategy
- - Inspection and Sanction Risk Management System
1. Fintech Regulation | Statutory Structure and the Regulatory Environment
Fintech regulation presumes a regulatory framework organized by business sector and by function, and the applicable statutes are determined by the substance of fund flows and functions rather than by the name of the service.
Payment Settlement and Electronic Finance Area
Payment-based services such as electronic payment settlement, prepaid charging, PG, and fund transfers are subject to the obligation to register as an electronic financial business under the Electronic Financial Transactions Act, and capital, human and physical requirements, internal controls, and computing facility standards apply at differing levels depending on the type of business.
For new types of payment models such as comprehensive payment settlement service providers, open banking linkage structures, and payment instruction transmission functions, the scope of regulation is also judged according to the structure and substance of fund flows.
Investment, Securities, and Virtual Asset Area
Investment-type or securities-type services and online investment brokerage may fall under the Financial Investment Services and Capital Markets Act, and where the substance of the service constitutes an investment contract security or a financial investment product, an obligation to obtain authorization or to register arises.
Recently, the assessment of securities status for token securities (STO), digital beneficiary certificates, and fractional investment structures, as well as the legality of issuance and distribution structures, has emerged as a key issue.
A business that buys, sells, exchanges, stores, or manages virtual assets, or brokers such activities, may constitute a virtual asset service provider under the Act on Reporting and Using Specified Financial Transaction Information, and strict obligations such as anti-money laundering and suspicious transaction reporting are imposed accordingly.
However, depending on the legal nature of the token, other statutes such as the Capital Markets Act may also apply together.
Financial Regulatory Exception System
Under the Special Act on Support for Financial Innovation, which took effect on April 1, 2019, an innovative financial service designation system was introduced, and where certain requirements are met, temporary and scope-limited exceptions to all or part of existing financial regulation are permitted.
As a result, a fintech-regulated service has a composite regulatory structure in which multiple statutes, including the Electronic Financial Transactions Act, the Capital Markets Act, the Act on Reporting and Using Specified Financial Transaction Information, the Credit Information Use and Protection Act, and the Personal Information Protection Act, may apply at the same time depending on the business structure.
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2. Fintech Regulation | The Points Where Regulatory Risk Arises
Fintech regulatory risk often materializes in the 'boundary areas' rather than in clear violations of law.
∙ The appropriateness of the business classification, such as prepaid electronic payment instruments, PG, or fund transfer business
∙ Whether the design of fund flows substantially exceeds the scope of authorization or registration
∙ The possibility that it constitutes conducting an unauthorized financial business
∙ The effectiveness and appropriateness of the AML, customer verification, and internal control systems
∙ Whether the business may commence without an innovative financial service designation
Because supervisory authorities judge based on 'substance' rather than name, fund flows, the revenue structure, and the risk-transfer structure must be reviewed comprehensively from the service design stage.
Legal Risk Structure of Supervision and Sanctions
A violation of fintech regulation can expand into administrative, criminal, and civil consequences and into damage to market trust.
∙ The possibility of criminal punishment (fine or imprisonment) for conducting an unauthorized financial business
∙ Administrative fines, suspension of business, revocation of registration, and criminal liability for violating the Act on Reporting and Using Specified Financial Transaction Information
∙ Sanctions and internal control improvement orders for violations of customer verification obligations and AML
∙ Financial dispute mediation, collective disputes, and claims for return of unjust enrichment and for damages
∙ Derivative transaction risks such as delays in listing review, termination of investment agreements, and the collapse of an M&A
In particular, a finding of unauthorized business or a violation of AML can lead directly to criminal risk, and the fact of a sanction itself can have a significant effect on corporate value and external trust.
3. Fintech Regulation | Structure and Key Issues of the Financial Regulatory Sandbox
The financial regulatory sandbox, which forms one pillar of the fintech regulatory framework, is a system operated under the Special Act on Support for Financial Innovation.
It is a framework that, for a financial service recognized as having innovativeness and the potential to increase consumer benefit, excludes the application of certain provisions of relevant statutes within a defined scope or grants exceptions.
This is not a full exemption but a temporary, conditional, and scope-limited exception confined to an individual service.
∙ The designated agent system
∙ The delegated testing system
∙ The expedited regulatory confirmation system
Each system differs in its requirements, scope of effect, and liability structure, so a strategic choice is needed according to the business model and the type of regulatory conflict.
Legal Issues of Innovative Financial Service Designation
Innovative financial service designation is a system that permits trial operation for a certain period in areas that conflict with individual provisions, such as authorization and registration requirements, restrictions on concurrent and incidental business, and business conduct regulations under current financial-related statutes, or for which the legal basis is unclear.
However, this does not mean a deemed general authorization or a comprehensive exemption, and it is effective only within the scope of the exceptions specified in the designation document.
Statutory provisions other than those subject to the exception apply as they are in principle, and civil liability in the event of consumer harm is not automatically excluded either.
In practice, the main issues are as follows.
▷ How to structurally demonstrate that applying existing regulation is unreasonable or unclear, as well as the necessity of applying the exception
▷ To what level the risk management system for financial market stability and consumer protection will be designed
▷ An advance strategy regarding the acquisition of authorization, statutory amendment, or incorporation into the system after the designation period ends
The designation period is in principle within two years, and extension is possible within the scope set by law, but unlimited exceptions are not permitted.
Therefore, the use of the financial regulatory sandbox should not remain a mere short-term experiment, and a structural design premised on the possibility of later institutionalization or incorporation into a formal authorization framework should be carried out in parallel.
Points to Note When Using a Regulatory Exception
A regulatory exception has a clearly limited scope of application, and if the imposed conditions are not met, it may lead to revocation of the designation or suspension of the business.
In addition, business that goes beyond the scope of the exception may be evaluated as a violation of general financial regulation, so careful review of the interpretation and operation of the exception conditions is needed.
The financial regulatory sandbox should be understood not as a means of circumventing regulation but as a structure for the trial use of an experimental system premised on a balance between innovativeness and consumer protection.
4. Fintech Regulation | Response Strategy
Fintech regulation is an area that requires a careful review of the applicable laws and supervisory standards from the stage before a new service is launched in the market.
When the business structure is complex, the scope and interpretation of the applicable laws can affect matters such as licensing, registration and reporting obligations, and the level of internal control systems that must be established, so legal assessment at the preliminary review stage is important.
Daeryun Law Firm supports companies in lowering the possibility of later disputes or regulatory findings and in designing a coherent business structure, through official inquiries, the submission of opinions, and consultation procedures conducted in accordance with the relevant laws and administrative procedures.
∙ Response to procedures for inquiries to financial authorities and requests for authoritative interpretation
∙ Review of fund and data flow structures before launching a new service
∙ Support for regulatory sandbox applications and condition consultation procedures
∙ Review of MyData, AML, and internal control systems and advisory on improvements
∙ Advisory on the design of tokenized securities and digital asset structures
Inspection and Sanction Risk Management System
Fintech regulation issues do not stop at simple matters of interpretation and can lead to administrative measures such as inspections, sanctions, and penalty surcharges.
Drawing on its experience with preemptive responses at the policy consultation stage, Daeryun supports stage-by-stage responses under a consistent strategy, from inspection response through administrative adjudication and administrative litigation, thereby managing a company's business continuity and reputation in a comprehensive manner.
∙ Response to dispositions such as corrective orders, penalty surcharges, and administrative fines, and development of mitigation strategies
∙ Comprehensive legal review and advisory on defense strategies for combined issues involving electronic finance, virtual assets, and personal information
∙ Conduct of administrative adjudication and administrative litigation and management of follow-up risks
