[Inside Chodong] Concerns Rise Over 'Innovative Finance STO' Becoming a Channel for Non-Performing Assets

Token Trading Expands to Artworks, Hanwoo, Real Estate, and Loans
Prevent the Misuse of STO as a Tool for Transferring Risky Assets

Issuing all valuable things in the world as securities, investing in them, and freely trading them. This is the goal pursued by token securities (STO, Security Token Offerings), also known as 'fractional investment.'

The STO market, which converts assets such as real estate, artworks, and Korean beef (Hanwoo) into tokenized securities and sells them to investors, has come closer to reality. Recently, financial authorities have allowed four art fractional investment companies?Tessa, Sotu, Artogether, and Art & Guide?and the Hanwoo fractional investment company Bankau to submit securities registration statements for STO.

At the same time, a securities registration statement form was created and distributed for use by STO operators. The securities registration statement is a document submitted to the Financial Supervisory Service (FSS) to issue securities to 50 or more investors through a 'public offering.' If the FSS determines that the registration statement has no deficiencies, the operator can issue tokens according to the statement, and investors can trade tokens through over-the-counter trading platforms or trading systems (HTS·MTS).

Securities firms are planning to issue STOs not only for artworks and Hanwoo but also for large-scale real estate such as buildings and hotels, social infrastructure (SOC) loans, and ship financing by collaborating with platform companies. If this happens, individual investors will have access to large tangible investment assets or project loans that were previously exclusive to institutional investors.

It is practically impossible to divide and trade tangible assets like real estate or food ingredients into small pieces corresponding to the number of investors. To trade, the assets must go through a securitization process. STO operators are expected to convert assets into trust beneficiary certificates (rights to income from assets) or investment contract securities and issue them as token securities in units of at least 50 tokens (public offering standard).

Looking into the issuance process, STO is essentially no different from asset securitization, which issues loans, time deposits, or project financing (PF) loans in the form of asset-backed securities. In the past, there were cases where overseas real estate was issued as asset-backed securities and sold to a limited number of individual investors. As STO becomes more widespread, the types of assets traded as tokens through such securitization processes will become much more diverse and extensive.

A concern is that STO could be exploited as a channel to dispose of non-performing assets. Currently, asset securitization in the capital market is often pursued by financial companies to sell down assets they hold. It is also frequently used for 'book off' purposes to remove assets from the books that are difficult to hold long-term due to internal risk management rules or increased loss risks caused by changes in market conditions.

STO, a form of asset securitization, could be misused to convert high-risk or non-performing assets into tokens and transfer them to individual investors. Compared to institutional investors who carefully assess investment risks, individual investors are more likely to prefer investing in assets with high expected returns despite high risks.

If the market becomes tainted from the early stages of introduction, STO as innovative finance will struggle to establish itself properly in the market. In addition to passive investor protection measures such as setting individual investment limits, various supplementary measures are needed to develop STO into a sound market.