The financial authorities have prepared related laws to allow not only fractional investments in new and nonstandard securities such as real estate, artworks, and music rights, but also existing standard securities such as stocks, bonds, and funds to be issued as security token offerings (STOs). The aim is to digitize private equity funds for institutions only or unlisted stocks, which were difficult to transact in small units, so they can be traded like stocks.
The Financial Services Commission on Nov. 4 held the third meeting of the "public-private joint security token offerings (STOs) council," composed of related institutions such as the Financial Supervisory Service and the Korea Securities Depository, related associations such as the Korea Financial Investment Association and the Security Token Council, and private experts, and released the "policy direction for security token offerings (STOs)" containing these details.
Security token offerings (STOs) are issued in digital form based on a distributed ledger, the core technology of Blockchain. They use virtual currency technology like Bitcoin but are backed by real assets such as real estate or stocks.
In the early stages of the discussion on security token offerings (STOs), the infrastructure discussion centered on fractional investment securities. This is because fractional investment securities are smaller in scale than existing standard stocks such as stocks or bonds and distribute revenue in a much simpler way, rather than exercising voting rights or paying dividends.
However, as discussions on tokenizing existing standard securities such as bonds or funds have intensified in global markets including the United States and Hong Kong, Korea has also decided to build infrastructure to tokenize existing standard securities.
The Financial Services Commission (FSC) said, "Existing electronic securities have systems for issuance, distribution, and rights management, but security token offerings (STOs) require new infrastructure suitable for a distributed ledger," adding, "We have drawn up a step-by-step roadmap and decided that brokerages and the depository will build the infrastructure together."
First, in February next year, when the related law takes effect, tokenization of private placement securities exclusively for institutional investors will take place. For stocks, unlisted stocks are expected to be tokenized through a trust method. Fractional investments, which are relatively easy to tokenize, will be allowed to tokenize publicly offered fractional investment securities from the first stage.
After that, the second stage is to expand the infrastructure to the level technically possible, such as tokenizing publicly offered securities, and the third stage is the authorities' plan to implement on-chain payments by linking stablecoins and other means of payment.
The policy direction also includes best-practice standards to support new products for fractional investment and protect investors.
First, pooling of underlying assets, which has been prohibited, will be conditionally allowed. If certain conditions are met—such as the same type, clear pooling criteria and purpose, prohibition on including nonperforming assets, and provision of information on individual assets—multiple underlying assets can be bundled to issue a single fractional investment security.
The financial authorities explained, "By easing regulations, assets that were small in scale and difficult to securitize can be commercialized, and various investment products may emerge."
The best-practice standards also specify concrete principles for investor protection. They include detailed provisions on disclosure for issuance and distribution of security token offerings (STOs), per-person subscription limits in public offerings, allocation methods, and conflict-of-interest prevention systems.
For example, while subscription limits are determined by considering the nature and scale of the underlying assets, a standard example of "30 million won or 5% of the issue amount, whichever is smaller" was presented. To enhance fairness in the allocation of publicly offered quantities, the guidelines recommend setting minimum ratios for general investor allocations and equal allocations in internal rules.