STO license dominated by former regulators?…A startup that ran a four-year pilot faces elimination

Lucentblock, a startup that has operated a real-estate tokenized securities (STO) platform as an Innovative Financial Service for four years, has called on financial regulators to reconsider the licensing process for an over-the-counter STO exchange, saying it "runs counter to the intent of the Act on Special Cases Concerning Support for Financial Innovation."

Huh Se-young, CEO of Lucentblock, said at a press briefing held jointly with the Korea Startup Forum on the 12th at Maru180 in Seoul’s Gangnam district, "It’s not that innovative financial service operators must be granted licenses unconditionally," adding, "We’re not asking for preferential treatment—only that decisions be made in line with the purpose for which the law was created."

The briefing followed the Securities and Futures Commission (SFC) under the Financial Services Commission (FSC) selecting, on the 7th, the Korea Exchange (KRX) consortium and the Nextrade (NXT) consortium as preliminary license candidates for an over-the-counter STO exchange. The preliminary license is set to be finalized at the FSC’s regular meeting on the 14th. If the SFC’s decision stands, Lucentblock will no longer be able to continue its related business.

Founded in 2018, Lucentblock was designated as an FSC Innovative Financial Service and has operated the real-estate tokenized securities platform “SOUYOO.” It has more than 500,000 members, with cumulative issued and distributed assets totaling about KRW 30 billion. The industry regards it as a first mover in Korea’s tokenized securities market.

Lucentblock stressed that the current process is not a "new license" but a procedure to institutionalize a service that has been operated under the financial regulatory sandbox. The FSC also said when it unveiled its plan in September last year for licensing an OTC fractional-investment exchange that it would "bring pilot services operated as Innovative Financial Services into the formal regulatory framework."

Nevertheless, Lucentblock argues that the actual licensing criteria were designed to favor incumbent financial institutions. Huh said, "Operators that have verified market viability and technical capabilities by running services without incident for four years are now at risk of being dropped, while institutions with no relevant track record are reportedly receiving higher evaluations."

He singled out the Korea Exchange, saying, "More than two years after receiving approval to distribute securities in a new securities market, it still has zero actual distribution records," adding that "entering the market without results is free-riding." He also cited as an issue the fact that both KRX and NXT have former FSC officials placed in executive roles.

Lucentblock also raised suspicions of technology leakage. The company claims that in August last year, Nextrade approached it under the pretext of discussing consortium participation and a potential investment, signed a non-disclosure agreement (NDA), and then received financial information, a shareholder roster, business plans, and core technical materials. Nextrade later applied directly for an STO distribution business license within a short period without making an investment, Lucentblock said.

Huh said, "Which blockchain architecture allows tokenized securities trading to function stably is core technology," adding that "the financial authorities need to explain how this matter was reviewed in the preliminary licensing process under the principle of fair competition." Nextrade has previously said, "We did not receive any confidential materials."

Lucentblock also took issue with potential procedural illegality. Huh said, "Even though a consortium involving large corporations and brokerages could be subject to a business combination review under the Fair Trade Act, they did not go through that process before applying for the preliminary license," adding, "This is a clear procedural privilege."

On the same day, Lucentblock submitted a complaint to the Korea Fair Trade Commission regarding obstruction of business activities and alleged violations of the obligation to report business combinations. Starting on the night of the 13th, it plans to hold a one-person protest in front of the Government Complex Seoul.

Investor pushback is also continuing. Huh said, "Shareholders, including major investors such as Capstone Partners and Hana Securities, view the matter seriously," adding that "a joint statement by venture capital firms is expected to be released soon."

Choi Ji-young, standing director of the Korea Startup Forum, said, "A structural loophole has been exposed that fails to protect the ‘first penguins’ who validated innovative services through the regulatory sandbox," adding, "If such cases are repeated, it could dampen the willingness to take on challenges across the broader startup ecosystem."

Huh emphasized, "If we fail to obtain a license, the rights and interests of 500,000 users and shareholders who have invested more than KRW 10 billion will be directly infringed," adding, "We will continue to raise issues to the end regarding the intent and fairness of the system."

Reporter Park Ju-yeon grumpy_cat@hankyung.com