Korea to legalize security token for fractional investment

South Korea is set to allow all kinds of fractional investments next year through the legalization of a security token (ST), a digital form of traditional assets such as stocks, bonds and real estate in a move to permit the securitization and trade of most tangible and intangible assets.

The Financial Services Commission (FSC) on Sunday unveiled measures to improve regulations on the issuance and trade of an ST, a digital asset that represents ownership or other rights and transfers value from an asset or bundle of assets to a token. The asset is based on a distributed ledger, a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, and accessible by multiple people.

The regulator plans to recognize STs as securities under the law and allow issuers, who satisfy the required conditions, to directly sell STs without brokerage houses. Smaller issuers, who do not fulfill the required conditions, will also be permitted to sell them through securities firms. All sellers are obliged to submit securities registration statements and prepare for investor protection measures when they issue STs, under the same regulations for issuances of other securities.

The FSC is scheduled to submit amendments to the Electronic Securities Act and the Capital Markets Act in the first half to lawmakers, which are separately working on virtual assets such as cryptocurrencies.

STs have been in the regulatory blind spot as the Electronic Securities Act does not allow their issuances by limiting the method of digitalizing securities.

“An ST ecosystem is expected to be formed as early as next year,” said an FSC source.

VARIOUS INVESTMENT SECURITIES

The move is predicted to increase investment opportunities in the local financial markets since it will allow the securitization not only of physical assets such as real estate and artwork but also of intangible assets such as intellectual property rights. For example, if an owner of a building worth 2 billion won ($1.6 million) issues 200,000 STs, investors can buy a part of the property with 10,000 won.

An ST can be issued at lower costs without risks of forgery and tampering as it is based on distributed ledger and smart contract technology, key features of decentralization.

“The introduction of STs will make fractional investments easier and safer,” said one of the industry sources. “That is also expected to create various forms of investment products as most assets will be securitized.”

Investors have been calling for the legalization of STs on increasing new types of securities such as investment contracts for fractional investments.

Currently, fractional investment service providers such as Musicow Inc., the country’s first music copyright trading platform, are exceptionally allowed to do business although they are not categorized as ST companies due to their lack of a distributed ledger.

The FSC decided to accept the demand by recognizing STs as securities under the Electronic Securities Act.

Once the STs are issued, they will be traded at a small over-the-counter market. The country plans to open a bourse for them - so called the KRX Digital Securities Market – for large size of trading. STs listed on the market will be converted to existing electronic securities.

“It is inevitable to convert them to electronics securities for stable transactions, given a limit to the processing speed of distributed ledger technology,” said an FSC official.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com

Jongwoo Cheon edited this article.