FSC narrows in on licensing two OTC exchanges for fractional investment

Korea Exchange–NXT consortium seen as front-runners

Lucentblock, embroiled in controversy, likely to be excluded

Regulators stick to stance of 'licensing up to two'

South Korea’s Financial Services Commission (FSC) is understood to have settled on a plan to license no more than two over-the-counter (OTC) exchanges for fractional investment. The Korea Exchange–Koscom consortium (KDX) and the NextTrade–Musicow consortium (NXT) are being cited as leading candidates. Lucentblock, which had raised concerns over fairness, is reportedly likely to be excluded from the preliminary licensing shortlist.

According to the financial industry on the 12th, the FSC is set to convene its regular meeting on the 13th and table “a review of preliminary licensing for fractional investment OTC distribution platforms” as an agenda item. Fractional investment refers to trading high-priced real assets—such as real estate, artworks and copyrights—by dividing them into small units. While some firms have temporarily operated issuance and distribution businesses under the Innovative Financial Services program (the financial regulatory sandbox), entry into the formal regulatory framework requires FSC authorization under the Capital Markets Act.

Initially, at the Securities and Futures Commission meeting on the 7th of last month, the FSC effectively preselected the Korea Exchange and NextTrade consortia as candidates for preliminary review as fractional investment OTC exchanges. With only the FSC’s regular-meeting approval remaining, Lucentblock—one of the contenders—held an emergency press conference and questioned the fairness of the screening process. The issue spilled into the political arena after President Lee Jae-myung mentioned the situation directly at a Cabinet meeting. Although items cleared by the Securities and Futures Commission are typically finalized at the FSC’s regular meeting without major اختلاف, the repeated postponements in placing the matter on the agenda were seen as unusual.

As the controversy grew, the FSC has since last month visited offices of ruling-party lawmakers on the National Assembly’s Political Affairs Committee to explain its “two licenses” principle. Vice Chairman Kwon Dae-young and the official in charge are understood to have met lawmakers in person to share the progress of the review and the criteria applied. A ruling-party official said, “The FSC explained that being designated an Innovative Financial Service (for Lucentblock) does not automatically lead to an OTC exchange license.”

The FSC is also said to have stressed to the National Assembly that “a distribution platform is not a mere business operator but market infrastructure.” The regulator’s view is that if the market is fragmented among multiple exchanges in its early stage, trading volume could be split, undermining price discovery and liquidity. This is also why its operating plan announced in September last year explicitly set out the principle of “licensing up to two.”

The FSC is reported to have told the National Assembly that it had repeatedly conveyed to Lucentblock that forming a consortium with a major exchange would be preferable to participating alone, but that this was not reflected in the final business structure. In response, Lucentblock argued, “The very act of financial authorities recommending a ‘consortium structure premised on participation by a major exchange’ to a specific company runs directly counter to the purpose of the Innovative Financial Services program.”

By Park Ju-yeon / Seo Hyung-kyo, grumpy_cat@hankyung.com