In early February, South Korea’s major government agencies such as Financial Services Commission and the Financial Supervisory Service released the “Plan to Improve the Regulatory System for Issuing and Distributing Security Tokens”. The South Korean financial authorities said they plan to submit amendments to the Electronic Securities Act and the Capital Markets Act to the National Assembly in the first half of this year and implement both regulations as early as next year. The overhaul will allow the issuance of tokens in the form of securities, which has not been permitted until now. Moreover, assets that are recognized as securities, will be able to be issued and distributed as security tokens under the Capital Market Act.
What are Security Tokens?
Security tokens are digitalized forms of assets such as real assets (real estate, intellectual property rights, etc.) and financial assets (stocks, bonds, etc.) issued in the form of securities under the Capital Markets Act using blockchain technology. In other words, securities are issued in the form of digital assets or cryptocurrencies commonly referred to as Bitcoin and Ethereum. The only difference from existing digital assets is that they are recognized as legal securities under the Capital Market Act in South Korea.
As an example of the use of security tokens, Blockstack, a U.S. blockchain startup, used STOs to raise funds for its business. In the real estate sector, the U.S. real estate fragment investment platform Realty is securitizing and distributing tokens as shares of real estate. German shipping company Vogemann raised funds with green ship tokens, and the Hong Kong government issued and sold $800 million in green bonds as STOs.
Opening atypical microcap market
Due to the exclusion of yield securities and investment contract securities from the securities to be distributed, restrictions on the use of private placements and small public offerings, and restrictions on sales, securities are mainly distributed in the listed stock market. The South Korean government, however, intends to solve these problems with security tokens and revitalize the new ‘atypical small securities’ market.
Since security tokens are easy to securitize, allow for a variety of small investments, and have ‘high circulation’ due to easy division and transfer of trading units, it makes them favorable for atypical small securities.
How will tokenized securities impact investment markets?
By allowing the issuance and distribution of security tokens, the local government aims to support the recent emergence of “securitization of various rights” and improve the issuance and trading of securities more efficiently and conveniently by utilizing distributed ledger (blockchain) technology. By utilizing security tokens, it will be easier to identify shareholders of unlisted stocks and convenient to issue and trade unlisted bonds in small units.
Along with the security tokens, a new category of securities called “token securities” which only existed in the form of “physical securities” and “electronic securities will emerge. The biggest impact that token securities will have on the investment market is that it will open and activate the market for atypical securities, such as “yield securities” and “investment contract securities” that have recently emerged.
Security tokens to revitalize the financial investment market?
According to a report by Boston Consulting Group (BCG), the market for STOs is expected to reach $16 trillion by 2030. This is a huge market considering that the current digital asset market is around $76.8 billion. The local government stated that it will create two new licensing systems in the reform. Issuer account management organizations, which can directly register and manage security tokens, and OTC brokerage businesses, will allow the distribution of STO. These licenses will allow companies to legally enter the security token market.
Currently, local companies are facing difficulties when issuing securities-like digital assets, however, with the STO emerging new investment streams are coming. Since security tokens are managed through relative securities laws, they are unlikely to deal with the same side effects as the existing digital asset market due to incomplete regulations. STO will be an opportunity to revive the financial investment market, so domestic securities companies are moving most actively to preempt the newly emerging market. In order to create an STO ecosystem, consortiums with related companies are being established, and Sandbox applications are increasing through affiliates.
Becoming a global financial hub
Despite the huge potential of the market, there are still many hurdles to overcome. The success of the STO industry will depend on how the detailed securities law is revised. If the focus is on institutionalization and activation rather than regulation, the market is bound to follow the same path as digital assets.
Korea rapidly entered the digital asset market and was overtaken by foreign companies. Security tokens are the food of the future and a great opportunity, missing out on which can cost Korea a loss in becoming a global financial hub.
Original (KR): https://n.news.naver.com/article/215/0001091379?sid=004