The government's system for security token offerings (STOs), touted as a new growth engine for the capital market, is moving into full swing, but the market is voicing criticism that the structure "strips away the innovation of Blockchain and only protects the vested interests of existing related institutions."
The STO market, which should use Blockchain technology to accumulate transaction data transparently and quickly without intermediaries, has been designed to route through existing financial infrastructure institutions such as Korea Securities Depository (KSD) and Koscom, undermining the purpose of the rollout, critics say.
According to the financial investment industry on the 30th, the domestic issuance and distribution framework for security token offerings (STOs), now fully legislated, requires issuers to link on a one-to-one basis the securities data recorded on a distributed ledger (Blockchain) with KSD's aggregate management system. The stated aim is to control total issuance for capital market stability, but the result effectively locks innovation into the old mold.
On the ground, many say this structure fundamentally blocks the Blockchain's core of "cost reduction and speed through decentralization." A representative of a Blockchain-related company, identified as A and requesting anonymity, said, "The Blockchain ledger itself is already an accumulation of transaction data that cannot be forged or altered," adding, "Forcing another round of approval and verification by the depository, as with existing electronic securities, reflects distrust of the technology and creates double regulation."
Koscom builds and manages integrated IT infrastructure that connects Blockchain networks with financial networks for small and midsize securities firms or issuers that lack technology and capital. But the securities industry also criticizes it for fostering structural lock-in that leans on the systems of an existing financial IT public enterprise rather than building technological self-reliance.
A domestic securities firm representative, identified as B, said, "Recently, the number of securities firms participating in Koscom's joint STO platform has increased to 10 in total—Kiwoom, Daishin, IBK, Yuanta, BNK, DB, iM, Meritz, Kyobo, and Daol Investment & Securities," adding, "Participation in Koscom's joint platform is not mandatory, but for small and midsize securities firms that find it difficult to build their own Blockchain nodes, it is effectively a subordinate structure." The representative said, "There are projections that the expense each securities firm must shoulder annually—either to join this joint platform or to link their own systems with related institution networks—will come to around 600 million won."
Government authorities say a minimum level of centralized verification is inevitable to protect investors and maintain the financial real-name system. A Financial Services Commission official said, "As far as we know, no country has yet introduced a fully public Blockchain for finance," explaining, "Public networks are subject to external policies and gas fees (commissions) such as those of the Ethereum Foundation, and they cannot conduct KYC and tracking—basic conditions of finance—so they cannot be filtered in advance."
Responding to industry claims of double regulation, the official added, "The system in which the depository participates as a node and manages does not handle personal information; it shares only aggregate information," and said, "Since the discussions on the Electronic Securities Act, we have reviewed whether to apply public or private models, and to prevent major incidents such as ghost bonds or ghost shares circulating, the law mandates aggregate total verification."
A Koscom official said, "The U.S. STO market may appear to use public Blockchain, but the United States grants legal enforceability only to the existing legacy databases (DB) managed by transfer agents (TAs) and does not give legal book status to the Blockchain ledger itself," while adding, "Korea grants legal enforceability to the distributed ledger itself, so to control technological instability, we have no choice but to start with permissioned (private) Blockchain."