Security token bill to be submitted by Korea's FSC

Finance

Published: 05 Feb. 2023, 17:22 Updated: 05 Feb. 2023, 18:24

Security token bill to be submitted by Korea's FSC

[FSC]

Tokenizing ownership of a company or an asset — as with fractional investment — may soon be possible in Korea, according to a proposal by a financial regulator on Sunday.

A security token is a relatively new type of investment asset based on distributed ledger technology and owned or traded in the same way as a stock or a bond.

Although security tokens are similar to electronic securities in the way that the transactions are digitalized, they are distinguishable because they use decentralized distributed ledger technology instead of a centralized register at a financial institution.

The change will allow investors to more easily buy real estate, art, music copyrights and other intellectual properties (IP) in fractional units.

A bill to amend the Act on Electronic Registration of Stocks and Bonds and Financial Investment Services and Capital Markets Act will be submitted by the Financial Services Commission (FSC) in the first half of the year. The National Assembly will have to vote on the amendment.

Details have not been disclosed by the regulator other than the fact that the issuing and exchanging of tokens will be strictly separated.

The regulator will create a separate institution to register, manage and issue securities. The token issuer, after fulfilling certain requirements that will later be specified, will be able to directly manage and issue tokens.

The issued tokens will be exchanged through a separate off-board exchange.

The regulator aims to open a digitalized stock exchange for a test run on Korea Exchange (KRX), although a specific date has not been set yet.

Listed security tokens will then be transited to electronic securities, as distributed ledger technology is unable to process large offerings where multiple investors participate.

In April, the FSC deemed music copyrights traded on Musicow as securities, as they involve an investment contract.

The regulator has designated the blockchain-based STO platform, which will be established by the latter half of the year, as an “innovative financial service.” The platform is being co-established by Shinhan Investment Securities and a A Panda Partners.

The service will allow real estate to be fractionalized and investment trusts to be exchanged.

“There has been steady demand to allow the issuance and exchange of a variety of informal stocks not allowed under the current financial system,” the FSC said. “We anticipate that the formation of a third exchange, which wasn't allowed before, to meet the demand for diversified securities to be issued and traded.

“Regulations to protect the investors under the current market system will be equally applied to all processes of issuing and exchanging of the tokens,” the regulator emphasized.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]