Electronic Securities Already Enable Fractional Investing. What Makes Tokenized Securities Different?

South Korea’s digital securities market is coming into sharper focus ahead of the launch of the tokenized securities, or STO, framework in February next year. The Korea Exchange, or KRX, is set to open an electronic-securities-based market for fractional investments, while over-the-counter markets for tokenized securities are also preparing to launch. The key challenge is carving out a distinct competitive edge for tokenized securities.

The Korea Exchange plans to open a new securities market for fractional investment products on Nov. 16. Investors will be able to trade fractional investment products issued in the form of electronic securities and backed by non-standard assets such as artworks and Korean native cattle through existing brokerage accounts.

On Sept. 4, financial authorities said they would expand the scope of tokenized securities beyond fractional investments to existing financial products starting in February next year, including money market funds, privately placed bonds and unlisted shares. The plan is to link the framework in stages to public-offering securities and stablecoin-based on-chain payments. That would extend tokenized securities beyond the fractional-investment niche to the broader capital market.

In fractional investing, the main task is distinguishing tokenized products from existing electronic securities. Once the Korea Exchange market opens, investors will be able to trade fractional investment products using only conventional securities accounts. Final approval decisions for two over-the-counter platforms that plan to distribute tokenized fractional investment products are also due in the fourth quarter. From next year, an exchange market based on electronic securities and over-the-counter markets based on tokenized securities are set to operate side by side.

24-Hour Trading and Small Investments Alone Have Limits as Differentiators

Industry participants say retail investors may not notice much difference simply because the issuance method shifts from electronic securities to tokenized securities.

For retail investors, what matters more than whether a product is structured as an electronic security or a tokenized security is which asset it offers and how much return it can generate, according to a financial industry official. Around-the-clock trading could also be introduced in the existing electronic securities market by extending trading hours, while small-value investing is already possible through mechanisms such as fractional-share trading.

Brokerages expanding their tokenized securities businesses also say blockchain use by itself is unlikely to be a meaningful advantage. A DB Financial Investment official said 24-hour trading and fractional investing can already be implemented with existing electronic securities. A different issuance method does not change a product’s return or investment value.

The upshot, industry participants say, is that tokenized securities will need to show they can offer products that are difficult to supply through the traditional securities market or manage rights and settlement information tied to physical assets more efficiently if the market is to take hold.

Differentiation as an 'Asset Department Store'

The fractional investment industry expects the competitive edge of tokenized securities to come from product diversity and rights management tailored to physical assets.

Tessa, an art fractional investment platform, said non-standard securities have limits in fitting into a standardized exchange market because dividend and liquidation methods, as well as investor decision-making structures, vary by issuer and by product. Tokenized securities record rights relationships on distributed ledgers and allow dividend and liquidation structures to be designed around a product’s characteristics, making them relatively flexible in accommodating a wide range of non-standard assets.

The model could also lower barriers to entry for businesses that repeatedly issue products on a project-by-project basis. When securities are issued for each individual project, such as a solar power plant, using an over-the-counter tokenized securities market may be more efficient in terms of time and cost than going through exchange listing requirements and procedures every time.

“The tokenized fractional investment market will eventually be like a department store of diverse assets,” Tessa Chief Executive Officer Kim Hyeong-jun said. “The ability to compare and invest in artworks, solar power and other products from multiple issuers, each with different underlying assets and return structures, in one market could become a key differentiator for tokenized securities.”

Transparency in Rights and Settlement Is Key

Stockkeeper, which operates the Hanwoo fractional investment platform BankCow, is focused on the ability to closely connect information on underlying assets with investor rights.

Hanwoo investment contract securities have a clear life cycle, from calf purchases to breeding, shipment, sale and settlement. Because the condition of the underlying asset, each investor’s rights and settlement details must be managed continuously, the company said tokenized securities infrastructure could link the relevant information within a single digital system.

Market participants also say the success of tokenized securities will depend less on blockchain technology itself than on the products and services built on it. Beyond longer trading hours or small-value investing, both of which existing electronic securities can already support, market competitiveness will hinge on whether tokenized securities can lower issuance costs for non-standard assets and manage rights and settlement structures more transparently.

“The difference investors will actually feel will come from more transparent rights management, faster and clearer settlement, and richer information on underlying assets,” Stockkeeper Chief Executive Officer Ahn Jae-hyun said. “How far the range of tradable products can be expanded will also matter.”