[Opinion] New Horizons in Financial Innovation: Expectations for 'Token Securities'

Real Estate and Artworks Securitized for Trading
Investment Possible by 'Decentralization' Splitting

On the 5th of last month, the Financial Services Commission announced the ‘Regulatory Framework Improvement Plan for the Issuance and Distribution of Token Securities (Token Securities Guidelines),’ declaring full approval for the issuance of a new type of security called ‘token securities.’ This is part of the Yoon Suk-yeol administration’s national agenda to ‘establish digital asset infrastructure and regulatory frameworks.’

This means that the government has stepped in to enable assets that were previously not investable as financial products because they were not based on monetary value to be transformed into financial products using blockchain (distributed ledger) technology, thereby attracting small-scale investments. Although this is a complex and unfamiliar topic for the general public, the financial and blockchain industries are showing keen interest because it allows new methods of fundraising and is expected to revitalize the previously rigid asset securitization market.

While this is an innovative policy decision to incorporate blockchain technology into laws and regulations, there is still a long way to go. Aside from laying the infrastructure through the Korea Securities Depository and the Korea Exchange and the blueprint to manage and supervise the issuance and distribution of token securities under the Capital Markets Act, concrete plans are still lacking.

The market’s interest centers on two main questions: What are token securities, and what can be done with them?

Until now, securities existed only in two forms: physical securities and electronic securities, both of which are managed in total volume by the Korea Securities Depository according to the ledger. Token securities fundamentally differ from physical and electronic securities in that they are issued on a distributed ledger (blockchain). Since multiple nodes (management entities) participate in the distributed ledger, in the future, several financial institutions could share similar responsibilities as managing entities. Once the Electronic Securities Act is amended, distributed ledgers will also be recognized as official ledgers under the law. This is called ‘decentralization.’

With the ability to use this new vessel of token securities based on distributed ledgers, non-monetary assets that were difficult to handle as securities?such as real estate, artworks, antiques, and Korean beef (Hanwoo)?can be securitized and traded. This creates new financial products that allow individuals or companies to divide high-value non-monetary assets into fractions and attract small-scale investments.

While no one can predict exactly what these will become, any asset recognized for its innovativeness can be divided and turned into an investable financial product. In the United States, token securities aligned with global ESG policies, such as carbon emission credits, as well as token securities for stocks, bonds, and beneficiary certificates, are being issued and traded. Kim Gap-rae, Senior Research Fellow at the Korea Capital Market Institute, analyzed in June last year in ‘A Study on Security Token Offerings (STO) in the United States’ that “as of April 2021, the market capitalization of circulating token securities was $700 million, with an average daily trading volume of only $100,000, but it is on a continuous growth trend.” Experts predict that “by 2030, the token securities trading volume is expected to grow to 20 quadrillion won.”

There are also concerns in the market. To protect investors, authorities have set the issuance of token securities to use a ‘private blockchain’ with restricted participants rather than a ‘public blockchain’ where an unspecified number of participants join the network. However, limiting it to a private chain raises concerns that the domestic token securities market could become isolated from overseas markets. Additionally, there are many criticisms that separating the issuance and distribution of token securities, as proposed by the Financial Services Commission, will make it difficult for companies handling each business to generate profits.

The financial authorities have ample time to communicate with the market. When announcing the guidelines, the Financial Services Commission stated that “to institutionalize the token securities business, we will submit amendments to the Electronic Securities Act and the Capital Markets Act to the National Assembly in the first half of this year.” We believe that when the authorities’ commitment to digital innovation in finance and the market’s outlook to share the benefits of fractional investment with more investors harmonize flexibly, a new horizon of financial innovation promised by token securities will open.

Kim Ki-dong, Chief Attorney, Law Firm Robax