A W370trn market set to open… Tokenised securities bill passes National Assembly plenary session

Capital Markets Act and Electronic Securities Act passed at plenary session

Tokenised securities brought into the regulated system… effective next January

Controversy over OTC venue licensing remains a variable

A bill to bring tokenised securities (STO) into the regulated financial system has passed the National Assembly plenary session. With a pathway opening for eligible issuers to issue and distribute tokenised securities using blockchain technology such as distributed ledgers, the launch of related markets is expected to gather pace.

On the 15th, the National Assembly convened the first plenary session of the 431st National Assembly (extraordinary session) and passed by consensus the “Partial Amendment Bill to the Financial Investment Services and Capital Markets Act (Capital Markets Act)” and the “Partial Amendment Bill to the Act on Electronic Registration of Stocks and Bonds, etc. (Electronic Securities Act).”

The bills are set to take effect from next January after a one-year preparation period. Before implementation, authorities will build distributed ledger-based securities account management infrastructure and refine detailed rules to protect investors. The Financial Services Commission plans to form a “Tokenised Securities Consultative Body” with the Financial Supervisory Service, Korea Securities Depository, and the Korea Financial Investment Association, among others, and begin preparatory work so the tokenised securities market can be operational as soon as the system takes effect.

Issuance and distribution brought into the regulated system… tokenised securities market to open

This amendment to the Capital Markets Act is seen as a key legal mechanism for bringing the distribution of investment contract securities, including tokenised securities, into the regulated system. Until now, investment contract securities were recognised as securities only at the issuance stage, but the amendment deletes that proviso, bringing not only issuance but also distribution under the scope of the Capital Markets Act.

In addition, it allows multilateral OTC trading via associations, comprehensive financial investment business operators, and OTC brokerage firms, thereby establishing a legal basis for a tokenised securities secondary market. Licensed OTC brokerage firms will be exempt from rules on concurrent business restrictions and certain investment solicitation and credit extension provisions, which is expected to make it easier for tokenised securities-only distribution platforms to enter the regulated system.

The Electronic Securities Act plays the role of putting in place the legal foundation for issuing tokenised securities. It includes tokenised securities such as beneficiary certificates issued by trust companies within the scope of mandatory electronic registration, so that even if they are issued on a blockchain basis, rights relationships are managed within the electronic securities framework. However, the scope is limited to licensed trust companies, suggesting that the policy of fostering tokenised securities in stages centred on the regulated sector will be maintained.

Shin Beom-jun, head of the Tokenised Securities Council at the Korea Fintech Industry Association, said, “It is highly meaningful in that it resolves a long-standing aspiration across the entire tokenised securities industry,” adding, “The bill’s passage is a signal that a market prepared over years by the public and private sectors is entering full-scale execution.”

“Set to grow to W367trn”… industry already prepared

The financial investment industry has already completed preparations to enter the market. Mirae Asset Securities formed the “Next Finance Initiative (NFI)” with Hana Financial Group and SK Telecom and has completed development of its own tokenised securities mainnet.

Hana Securities participated in a testbed construction project led by the Korea Securities Depository, and Shinhan Investment Corp. is working to build an “all-in-one service” for tokenised securities through the collaborative initiative “PULSE” with SK Securities and LS Securities. NH Investment & Securities and KB Securities are also preparing to enter the market with their respective partnership models.

The reason the industry is focusing on tokenised securities as a new growth engine is the market’s size and growth potential. Citigroup projected that the global tokenised securities market could reach $5trn by 2030. Consulting firm Quinlan & Associates forecast that tokenised securities would account for about 43% of total securities trading value in the same year.

In line with this, observers expect South Korea’s tokenised securities market to grow rapidly as well. Boston Consulting Group (BCG) estimated that the domestic tokenised securities market could reach W367trn by 2030.

Controversy over OTC venue licensing remains a variable

Controversy surrounding preliminary licensing for a tokenised securities-only OTC trading venue remains a variable. This is because fractional investment platform Lucentblock, questioning the fairness of the process behind its failure to obtain preliminary approval, reported alternative trading system NextTrade (NXT) to the Korea Fair Trade Commission over alleged technology theft.

As the controversy spreads, the FSC’s preliminary approval decision is also being delayed. The FSC had been expected to announce preliminary approval recipients at its regular meeting on the 14th, but did not table the relevant agenda. The industry believes the FSC has deferred judgment in consideration of the dispute over the OTC venue licence.

There are also concerns that the licensing delay could affect the overall timeline for launching the tokenised securities market. The Korea Fintech Industry Association said, “If the decision to withhold approval is prolonged, the fractional investment industry as a whole could contract. We must not miss the golden time for the transition to next-generation finance,” urging the FSC to reach a decision promptly.

Hwang Doo-hyun, BloombergBit reporter cow5361@bloomingbit.io