[Token Securities Are Coming] ① A Tempest in a Teacup or a Storm in the Capital Market?

Interest in Institutionalization Promotion... Subject to Capital Market Act Regulation
"367 Trillion KRW Scale by 2030" vs "Market Activation Difficult"

The Financial Services Commission has announced a timeline aiming to submit a legislative amendment for the institutionalization of token securities within the first half of this year and to implement it by the end of next year. Opinions are divided over token securities, with optimistic forecasts that they will become a new frontier in the capital market as securities utilizing blockchain technology, while pessimistic views suggest that market activation will be limited for the time being due to circulation volume constraints.

The Birth of a New Form of Securities

Token securities refer to securities based on blockchain technology. Unlike centralized financial companies directly intervening in securities issuance, decentralized blockchain technology is integrated. Verification and storage are conducted through nodes participating in the blockchain, enhancing transparency. It also becomes possible to issue assets in fractional units, and automation of tasks such as dividends and disclosures is enabled through smart contract technology. Furthermore, transaction records are not stored and managed on a centralized server but maintained and managed by multiple nodes in the network, so even if records are tampered with, altered, or stolen, the data remains intact.

When unlisted stocks are issued as token securities, unlike the previous system where shareholders could only be identified on the record date, shareholders can be identified at any time, facilitating corporate disclosures and hostile takeover defenses. Transaction convenience also improves. Nevertheless, although the form is a token, the substance is securities, so they are fundamentally subject to regulation under the Capital Markets Act.

The FSC named it token securities, inspired by a new issuance form utilizing blockchain technology following physical securities and electronic securities in terms of securities systems. It can issue from traditional securities such as equity securities, debt securities, and derivative-linked securities to recently emerging atypical securities such as beneficiary certificates and investment contract securities. It becomes easier to securitize tangible assets like real estate, artworks, and Korean beef (Hanwoo), and it becomes possible to issue intangible assets such as copyrights and patents in the form of securities. Fractional investment is incorporated into the institutional framework. Funding for startups and fintech companies can become smoother than before.

Intangible Assets Such as Copyrights and Patents Also Issued in Securities Form

The birth of securities integrated with blockchain technology is receiving high expectations from the market. Hana Financial Economic Research Institute, based on global market forecasts announced by BCG Consulting, estimated the domestic token securities market size to start at 34 trillion KRW in 2024 and grow to 367 trillion KRW by 2030. It also forecasted that the financial industry-related market, including stocks and real estate, would account for 70% of the domestic token market and could reach 14.5% of the domestic gross domestic product (GDP) by 2030.

Amid expectations that token securities could become a new growth engine, competition among securities firms to secure early positions is fierce. KB Securities formed a consultative body called 'ST Owners' to expand the ecosystem of token securities-related businesses and strengthen collaboration. Shinhan Investment Corp. is building an STO alliance by partnering with blockchain technology companies, security token issuance platform providers, and asset sourcing companies. Mirae Asset Securities, KB Securities, Samsung Securities, and others are preparing to enter related businesses by forming consultative bodies and establishing new departments. The FSC plans to test the distribution of investment contract securities and issuance and distribution of beneficiary certificates through a sandbox if innovation is recognized even before legal amendments. Securities firms are showing active interest, requesting separate regulatory exemptions for token securities businesses.

The FSC has allowed issuance without going through securities firms so that fractional investment companies and other operators can independently raise funds through token securities. Due to the advantage that multiple nodes verify records making tampering or alteration impossible, issuer account management institutions are permitted for token securities. Fractional investment companies can issue investment contract securities in token form and directly attract investors without going through securities firms, while investor recruitment through securities firms' underwriting and placement remains possible as before.

Additionally, the FSC plans to establish licensing units for over-the-counter (OTC) trading of investment contract securities and beneficiary certificates to allow multilateral negotiated brokerage services for smooth transactions. To protect general investors, investment limits will be set, and multilateral negotiated brokerage and proprietary trading of securities issued, underwritten, or placed will be prohibited.

This will allow the emergence of specialized distribution platforms licensed separately for OTC brokerage or existing securities firms to open OTC markets by registering additional business. Under the principle of separating issuance and distribution, whether token securities are issued directly or through securities firms, they will be distributed through third-party OTC brokerage operators. The listing market for investment contract securities and beneficiary certificates will utilize the current securities market infrastructure such as the Korea Exchange.

Token Securities Are Also Securities... Time Needed for Activation

However, experts believe that the introduction of the token securities system does not immediately mean market activation. They argue that time is needed to lay the groundwork. Minho Lim, a researcher at Shin Young Securities, said, "Looking at overseas cases such as the U.S. and Singapore, countries that started token securities earlier than us have not yet achieved significant results," adding, "It seems to be a process of coordination through dialogue between financial authorities and the industry."

Wooyoung Seok, head of the Digital Asset Business Promotion Team at KB Securities, said, "Products containing content not seen in traditional securities markets will gradually increase, and if products are launched based on good ideas, new ideas stimulated by them can emerge, potentially expanding the market," but also explained, "It means the system is open, but it does not mean that anything can be securitized just with ideas." He added, "Even if issuer account management institutions issue token securities without going through financial companies, securities registration will be required, and supervisory authorities will filter this."

Hyungjoong Kim, president of the Korea Fintech Society, emphasized, "At the time a new system emerges, the government needs to inform and educate about how the existing system differs from the token securities market and how to participate stably," adding, "From the perspective of market makers, management should allow the market to activate naturally rather than artificially." He also said, "Unlike past Initial Coin Offerings (ICO), token securities issuance (STO) will be conducted under strict supervision by regulatory authorities," and "From this perspective, token securities issuance is as difficult as securities issuance, so it is expected that the market will not activate easily for the time being."