From BTS Songs to Samsung and SK Hynix Shares, South Korea’s Tokenized Securities Market Set to Expand

Token Investing to Open From February Next Year

‘On-Chain Finance’ to Take Hold

Small-Ticket Investment in Illiquid Assets to Become Possible

Liquidity for Fractional Investment Products to Improve

New Business Opportunities for Brokerages

Stablecoin Legislation Remains Key

Tokenized securities, which use blockchain technology to split and trade rights to a range of real and financial assets such as real estate, music copyrights and artworks, will gain full legal effect in February next year and be formally introduced into South Korea’s regulated financial markets. The securities industry is focusing on the convenience of the product. Because transactions are based on blockchain and other distributed ledgers, issuers and investors can trade directly without intermediaries. Another advantage is 24-hour trading. Tokenized securities also make fractional trading easier and can cover assets ranging from stocks to physical property.

That helps explain the strong interest in the government’s “policy direction for tokenized securities,” released on Sept. 4. In the financial investment industry, the move is being viewed as the start of the on-chain finance era in earnest, with everything from stocks to BTS songs potentially issued as tokenized securities.

◇Starting With Unlisted Share Trading

Market participants expect adoption to begin with trading in unlisted shares. Financial authorities said they would pursue a plan to tokenize unlisted shares through trust structures when the related system takes effect in February next year. One financial investment industry official said brokerages that issue tokenized securities backed by unlisted shares and investors would be able to trade one-on-one.

The policy is also seen as making it easier for brokerages and over-the-counter trading platforms to handle tokenized securities because authorities decided not to create a separate licensing regime solely for them. Firms that already hold financial investment business licenses will be allowed to handle tokenized securities within the scope of those existing approvals. In practice, that means a brokerage licensed for investment brokerage in ordinary shares could immediately underwrite or arrange public offerings of tokenized securities backed by unlisted stocks.

◇Fractional Investing May Get a Lift

Financial authorities also introduced measures to revitalize fractional investment products. The most notable is a decision to allow “pooling,” or bundling together fractional products of the same type. For example, music copyrights tied to multiple singers such as IU, BTS and Tae Jin-ah could be grouped into a single tokenized security.

A venture investment industry official said Musicow had already frequently sold multiple copyrights in bundled form. Allowing such pooling could reduce transaction costs. Financial authorities also decided to conditionally permit the issuance of tokenized securities backed by future receivables.

Investor safeguards were also strengthened. Retail investors buying tokenized securities through over-the-counter platforms will face an annual net purchase cap of 100 million won. Retail investors subscribing to public offerings of fractional investment products will be allowed to participate only up to the smaller of 30 million won or 5% of the issuance amount. Over-the-counter trading platforms will also be required to consult in advance with the Financial Supervisory Service when supporting tokenized securities trading.

◇New Business Opportunities for the Securities Industry

This move to formalize the market stands to significantly change the investment environment for retail investors. Above all, it broadens access to small-ticket, diversified investment in illiquid assets that had largely been the domain of institutions and wealthy investors, including high-priced commercial real estate, infrastructure, high-quality unlisted shares, music and art. Secondary trading, which faced heavy restrictions during the regulatory sandbox phase, is also poised to become more active through licensed multilateral over-the-counter platforms. That would make it far easier to cash out of fractional investment products that were often locked up until maturity after purchase. The impact on the financial investment industry could also be substantial. Brokerages would be able to move beyond fee-based revenue models and tap new income streams from sourcing unconventional assets, fractionalizing them and arranging public offerings as part of investment banking operations. As a result, competition among major securities firms to build digital infrastructure and gain an early lead in the tokenized securities market is likely to intensify.

Market participants broadly agree that stablecoin legislation is the final key variable. A second-stage virtual asset bill that includes measures to institutionalize stablecoins remains under discussion by financial authorities and the National Assembly. One financial investment industry official said 24-hour trading would also require stablecoin rules to be put in place. Fully realized on-chain finance will take more time.

▶Tokenized Securities

These are securities issued and distributed through entries on a blockchain ledger. In addition to fractional investment products, conventional securities such as stocks and bonds can also be issued in tokenized form. In South Korea, they were formally institutionalized through revisions to the Electronic Securities Act in February.

Shim Woo-il, Hankyung.com reporter goodwill@hankyung.com