Korea Seeks to Catch Up in Tokenized Securities Market After COVID-19 Setbacks

Korea was an early adopter of fractional investing in physical assets, a trend that surged during the COVID-19 pandemic. Young investors, lacking substantial capital yet seeking diverse investment strategies, eagerly embraced these opportunities.

Korea was among the first movers in the realm of fractional investing in physical assets, a trend that surged notably during the COVID-19 pandemic. Young investors, lacking substantial capital yet seeking diverse investment strategies, eagerly embraced these opportunities. The range of products on offer is broad, including art, real estate and even livestock.

However, in 2022, the market faced setbacks when financial authorities determined that such investments bore the characteristics of securities. While some projects managed to restructure and enter a regulatory sandbox, many others stalled. The industry has continued to call for legislation and comprehensive guidelines.

"It will be around 2027 for the security token offering (STO) market to fully mature once legislation is enacted. Korea has significantly fallen behind in this area ... like a store that only accepts cash while others accept both cash and cards," said Lee Se-il, head of Shinhan Investment & Securities' blockchain department, at a discussion co-hosted by Rep. Kim Jae-sub and Rep. Min Byoung-dug at the National Assembly on Sept. 4.

Tokenized securities represent fractional ownership of physical or financial assets, issued via blockchain technology. By 2030, they are projected to account for 10 percent of global GDP, according to Samil PwC Business Research, ultimately converting all the world's physical assets and intellectual property in the form of tokenized securities.

A legislative push is gaining traction in the 22nd National Assembly, with Rep. Kim of the ruling People Power Party and Rep. Min from the main opposition Democratic Party both preparing to propose a bill.

The new measures are expected to apply the same regulations governing securities, along with detailed ordinances addressing sanctions and other concerns.

"Both ruling and opposition parties have committed to the swift institutionalization of tokenized securities in their policy platforms, so we can expect legislation in the second half of the year," said NH Investment & Securities analyst Yoon Yoo-dong.

The recent appointment of Yoon Chang-hyun as head of KOSCOM, an IT system provider owned by the Korea Exchange, has also bolstered hopes for STO's legalization. Yoon had previously pushed for STO laws in the 21st Assembly, but the effort stalled and the bill was dismissed amid political battles among the political parties.

Rep. Kim Jae-sub from the ruling People Power Party speaks during a discussion on the legalization of security token offerings at the National Assembly, Sept. 4. The discussion was co-hosted by Kim and Rep. Min Byoung-dug from the opposition Democratic Party of Korea. Both legislators are preparing to introduce a bill in the 22nd National Assembly. Courtesy of Rep. Kim Jae-sub

While the market welcomes this progress, a mixture of optimism and concern persists.

"If there are 100 companies looking to run business, only five to 10 will be proved 'real' ones as time goes by," Lee Jun-han, general manager at VMIC Aviation, told The Korea Times.

VMIC, an aviation asset management firm, is a member of an STO consortium for aircraft engine sharing, the only initiative to be granted sandbox status by the financial authorities in the past two years.

"By mitigating these risks (the absence of legalization), more robust business models can be created, and the market can become more active," Lee said, pointing to Singapore's Monetary Authority, which has established explicit guidelines for tokenized securities businesses and eligible investors.

Meanwhile, startups that pioneered the concept in Korea are grappling with growing competition. Securities firms, backed by substantial capital, are accelerating their entry by forming multiple consortiums.

"In every industry, the survival of the fittest is inevitable. But honestly, we worry about whether there's a room for us," said Lucent Block CEO Huh Se-young, also at the discussion hosted by Rep. Kim and Min. His startup, founded in Nov. 2018, specializes in tokenizing real estate.

Yet, ultimately, the financial market will judge these ventures based on their ability to gain traction, regardless of STO classification itself, according to Anna Liu, general manager of tokenization at HashKey Group.

"Turning the proof of concept stage into real commercial use while sustaining the momentum and ensuring profits are vital. If we can't profit, it's not effective, and it won't contribute meaning to the market," Liu told The Korea Times.

Legislation is the first step to address these challenges.

"Many Korean retail investors are involved in crypto and are token holders. If you don't allow them to trade, do you think they will go to other jurisdictions' exchanges, like unregulated exchanges abroad? Probably yes. Is there a better way to protect them? Probably yes as well."