Brokers pitching their best security token ideas ahead of law

Finance

Published: 14 Feb. 2023, 18:13

Brokers pitching their best security token ideas ahead of law

Blocks with locks on dark blue background. [SHUTTERSTOCK]

Financial institutions are trying to get ahead of the trend by creating security token offerings even before they are legal in Korea.

Some are investing in platforms that can issue security tokens, while others are pushing to acquire operators of tokenized assets.
The regulator plans to submit a security token bill in the first half.

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

Efforts related to the technology come after years of misses in Korea with blockchain-based initiatives, with booms and dramatic busts, and under-regulation followed by stifling over-regulation. They also come after campaign promises in the last election to encourage blockchain-related business in Korea and allow for innovation related to the technology.

Financial Services Commission Chairman Kim Joo-hyun speaks in a briefing in central Seoul in January. [NEWS1]

The Financial Services Commission (FSC) on Feb. 5 published guidelines defining which tokens would be regulated as securities.

It said certain blockchain-based tokens will be regulated as securities if they have corresponding characteristics laid out in Korea’s Capital Markets Act. That means digital assets that provide the rights to dividends or residual property will be categorized as security tokens.

Since the law hasn't yet been passed, brokerage firms are largely in the stage of investing in technologies without a clear idea on how they would profit.

KB Securities is preparing to develop a platform for security tokens.

Tests for the core technologies of the platform are complete. It plans to further develop and complement the service after regulations are made clearer, said Jeon Dong-jin, a spokesperson for KB Securities.

Shinhan Securities formed a joint venture called APND, a software developer, with IGIS Asset Management and blockchain technology developer EQBR Holdings.

APND was recognized as an innovative financial service by the FSC in December. The joint venture is developing a security token offering platform.

On the platform, retail investors will be able to participate in alternative investment financial products such as those related to large-scale commercial real estate and loans. The goal is to launch in the third quarter.

“We’re seeing the business as a new source of profit as demand for fractional investment in properties, like copyrights and art, has spread in the market,” said Cho Joo-ik, a PR spokesperson at Shinhan.

Music copyright sharing platform Musicow, for instance, saw the number of users jump 20 percent on year as of February.

Shinhan is also testing technologies for its own security token platform through Lambda256, a blockchain solutions provider.

Mirae Asset Securities formed a partnership with “multiple fractional investment businesses” to prepare a stable security token business structure, it said. The company’s goal is to create a security token and account management platform.

Financial firms located in Yeouido, western Seoul [YONHAP]

Some are going with a different strategy.

Daishin Securities is in the process of acquiring Kasa Korea, which sells fractional ownership in Korean buildings and provides a market for the trading of these units.

“We’re conducting due diligence on the acquisition,” said Kang Jun-beom, a PR spokesperson for Daishin Securities. “The discussion began last year, but fell through. Discussions have recently resumed.”

Daishin is acting more cautiously than its rivals.

“We need to review the systemic changes,” Kang added about the security token market.

Some experts agree caution needs to be taken.

“Some people believe the authorities are encouraging security tokens, but there isn’t a country that encourages issuing securities,” said Kim Hyoung-joong, professor at Korea University School of Cybersecurity.

“Issuing and listing security tokens will become more challenging once they become regulated. That could reduce the attractiveness of tokens, as their price was driven by pumping and dumping.”

It will be a “fantasy” if brokerage firms prepare security token service believing it will be their new cash cow, he added.

Some say the guideline isn’t clear.

“The guideline has been published, but details of the regulations need to be specified for companies to prepare” relevant services, said Jeon from KB.

“It’s important to raise the market share in the initial stage, but players are still in the waiting line as the law awaits to be passed and unpredictability remains,” said Cho from Shinhan.

“The guideline only states how it will regulate the infrastructure, not how token securities can be issued, which is the key question that people want to know, according to Cho Jung-hee, managing partner at Seoul-based D.CODE Law Group.

“The current guideline only states regulations on security tokens, not those that don’t fall under securities. That means there aren’t regulations on how the authorities will respond to artificial market making or market manipulation of tokens that aren’t categorized as securities,” he added.

BY JIN MIN-JI [jin.minji@joongang.co.kr]