Korbit Research Center: "Token Securities Market Must Lead to Increased Liquidity"

[Asia Economy Reporter Lee Jung-yoon] On the 6th, Korbit Research Center, under the domestic virtual asset exchange Korbit, announced that it has published the first report in a series related to Security Token Offering (STO) titled "Blockchain and Revitalization of the Distribution Market." The Korbit Research Center explained that securing liquidity is crucial for the activation of the Security Token economy.

Amid the recent situation where financial authorities have proposed measures to organize the regulatory framework for Security Token issuance and distribution, and STO has emerged as a national agenda for digital financial innovation, this report covers ▲Characteristics of Korean-style Security Tokens ▲Promotion of Security Token securitization ▲Global market trends of Security Tokens ▲Regulatory status in major countries.

The Korbit Research Center identified three characteristics of domestic Security Tokens: fractional investment, separation of the primary and secondary markets, and mirroring. Fractional investment refers to investing in tangible and intangible assets such as artworks, real estate, and music copyrights, which were previously difficult to securitize. The Korbit Research Center analyzed that, compared to overseas cases where Security Token issuance was mainly focused on traditional financial assets like stocks or bonds, the domestic market has proven the marketability of fractional investment centered on companies like Musicow and Kasa.

The separation of the primary and secondary markets is a traditional securities market operation method, and it is predicted that the same system will be applied to Security Token trading. Mirroring refers to the method of issuing tokens on a blockchain involving securities companies to ensure one-to-one matching with records within the electronic securities system. In mirroring, until interoperability between the electronic securities system and blockchain is secured, securities companies participate as intermediaries to reconcile the records of the two ledgers. Therefore, mirroring is expected to serve as a transitional solution until blockchain is accepted as the account book recording method under the Electronic Securities Act.

The most notable point for the Korbit Research Center was the expansion of liquidity for Security Tokens. They emphasized that liquidity is more important than issuance for the efficient operation of the Security Token economy. Furthermore, they stressed that tokenization itself does not guarantee liquidity. Tokenization enables interoperability, reduction of issuance and transaction costs, fractional ownership, and 24-hour trading, which were impossible with traditional financial assets. Since these elements minimize transaction friction, the Korbit Research Center pointed out the need to create a Security Token distribution market that fully leverages the characteristics of blockchain.

Two trends have been confirmed in the global Security Token market over the past two years. First, compared to 2021, the number of Security Token issues in the market increased last year, and the types diversified. In particular, while the rights guaranteed by tokens in 2021 were limited to dividend rights and voting rights, last year, additional rights such as node operation, fractional ownership, and venture capital investment return profit sharing were added, resulting in tokens guaranteeing various rights.

Also noteworthy is that all top traded tokens over the past two years were based on public blockchains. Among the top five Security Tokens by global trading volume last year, four were Ethereum-based ERC-20 tokens, and one was an Algorand-based token, all based on public blockchains. From the perspective of interoperability, an important factor in Security Token securitization, the ERC-20 token standard developed on Ethereum is often supported by other Layer 1 networks besides Ethereum. Therefore, it is expected to have significant advantages in terms of usability and interoperability of Security Tokens.

Meanwhile, in September 2021, only five exchanges allowed Security Token trading, but as of the end of January this year, Security Tokens are traded on 63 exchanges worldwide. However, although about 70 exchanges and companies have been preparing to issue Security Tokens since the second half of 2021, it is known that 47 of them have discontinued their businesses.

The Korbit Research Center also presented an analysis of the regulatory status of leading countries in the global Security Token market: the United States, Singapore, and the United Kingdom. The United States is strict in judging securities based on the Howey Test but shows a flexible stance on token issuance. Singapore tends to regulate tokens that do not fall under its securities laws by creating new laws rather than discouraging issuance. It is also characterized by actively utilizing fintech-centered regulatory sandboxes. InvestaX, a Security Token exchange established in Singapore in September 2021, was authorized under the sandbox. The United Kingdom also uses regulatory sandboxes but operates them under the leadership of its financial authorities, focusing on financial services or markets.

Jung Seok-moon, head of the Korbit Research Center, stated, "We must not forget that the top traded assets in overseas Security Token markets are based on public chains like Ethereum," and added, "The financial authorities' STO guidelines should ultimately be operated to lead to increased liquidity in the Security Token market."