Debate over the fairness of the review process is spreading after the Financial Services Commission's preliminary licensing review of fractional investment trading platforms. LucentBlock, which has operated the real estate fractional investment platform "SOU" through the regulatory sandbox, was eliminated, while consortia centered on existing financial institutions were selected.
But industry players are pushing back, saying the debate could instead be seen as "sandbox favoritism" toward certain corporations. That is because the selected Korea Exchange (KRX)-Koscom (KDX) consortium and the NEXTRADE (NXT)-Musicow (NXT) consortium also include many companies that came through the sandbox.
◇ Controversy over bypassing the Korea Fair Trade Commission (FTC)… Financial Services Commission (FSC) says "coordination is typically conducted before final approval"
Another point of contention is that the Financial Services Commission did not go through prior coordination with the Korea Fair Trade Commission during the push for this preliminary license. Under Article 24, Paragraph 3 of the Act on the Structural Improvement of the Financial Industry, the FSC must consult with the FTC in advance to determine whether there are restrictions on competition when approving stock ownership by financial institutions. The FTC says it did not receive any prior notice or request for consultation on the preliminary licensing in question.
However, the FSC drew a line under the controversy, saying that given the nature and criteria of the preliminary licensing stage, prior consultation with the FTC is a procedure conducted before the final license.
An FSC official said, "In preliminary licensing, we focus on evaluating business feasibility, and typically we conduct prior coordination with the FTC on requirements such as whether fair competition is undermined before the final license," adding, "This is not something that can be overlooked in the process."
◇ "We pioneered the market, and the incumbents are freeriding," LucentBlock claims… STO industry says "a result achieved together"
The Securities and Futures Commission under the Financial Services Commission reviewed three preliminary license applications for fractional investment over-the-counter exchanges on the 7th and selected the KDX and NXT consortia.
In response, LucentBlock argued that its operating data and proven results from the past seven years were not properly evaluated in the review, and that institutions with no track record were selected.
Heo Se-young, CEO of LucentBlock, held a press conference on the 12th and said, "While we were building the market from scratch, the consortium in question did not contribute to the security token offerings (STOs) industry," adding, "We are not saying an innovative financial service provider must be licensed unconditionally, but that the decision should be made in line with the purpose of the law."
However, observers say it is difficult to interpret this issue simply as a "startup vs. conglomerate" dynamic, as corporations such as Musicow, Kasa, and Pumbl, which went through the same regulatory sandbox, are included in the KDX and NXT consortia. When financial authorities introduced the issuance-distribution separation principle to prevent conflicts of interest during the STO legalization process, they chose issuance. LucentBlock has focused on the distribution platform.
Currently, Musicow, Sejong DX, Stockeeper, and TogetherArt are participating in NXT, while Kasa, Pumbl, and Buysell Standards have joined the KDX consortium. The reason fairness concerns are being raised across the industry is that only LucentBlock is being highlighted as the sole "innovative corporation."
An official at a fractional investment company said, "Many sandbox-origin corporations, including Musicow, joined the consortia and accepted the principles of institutionalization," adding, "The growth and institutionalization of the STO market is an achievement made together by fractional investment corporations with differentiated products such as real estate, music royalties, and artworks."
LucentBlock also raised allegations that NEXTRADE (NXT) signed a nondisclosure agreement (NDA) on the grounds of reviewing an investment and consortium participation and then stole its technology. In response, NEXTRADE said the materials it received from LucentBlock did not contain confidential information and that it was a general review in the course of forming a consortium.
◇ Previously pushed to amend the Financial Investment Services and Capital Markets Act… scrapped amid "favoritism" controversy
The National Assembly had previously discussed what status to grant regulatory sandbox operators after institutionalization.
An amendment to the Financial Investment Services and Capital Markets Act, introduced in March last year by Rep. Cho Seung-rae of the Democratic Party of Korea as the lead sponsor, sought to revise the current law so that innovative financial business operators that went through the regulatory sandbox could continue their business. But during the review, concerns reportedly emerged that it "could benefit specific corporations." In the end, the bill was disposed of as "alternative adopted and rejected," and the final version of the amendment that later passed the National Assembly's plenary session completely excluded the related content.
Most fractional investment companies have been cutting staff and barely maintaining their existing businesses because the STO legalization debate that began in Jan. 2023 was delayed. Fortunately, with the National Assembly passing the amendment to the Financial Investment Services and Capital Markets Act on the 15th, the foundation for institutionalization has been laid. With only the selection of operators to run the market remaining, the industry is calling for a swift market launch.
Musicow said, "If this controversy leads to a delay in opening the market, the entire fractional investment industry that has waited years for institutionalization could stand at a crossroads of survival," adding, "If the distribution market does not launch normally, the burden will inevitably spread across the industry," expressing concern about a potential delay in the preliminary licensing schedule.
The FSC is expected to put the preliminary licensing agenda for fractional investment over-the-counter exchanges on the table for discussion at the regular meeting on the 28th.