South Korea Advances Towards Security Token Offering (STO) Legalization: A New Era for the Securities Market

South Korea is once again energizing efforts to legalize Security Token Offerings (STOs), a move poised to transform its capital markets. On November 21, Financial Services Commission (FSC) Chairman Lee Eok-won reaffirmed the government’s commitment to integrating STOs into the capital market policies framework. This stance marks a significant turning point, reigniting optimism within the industry after years of stalled legislative debates.

STOs, which leverage blockchain technology to tokenize tangible assets like stocks, bonds, and real estate, as well as traditional financial instruments, promise to revolutionize how assets are issued and traded. Although the FSC introduced guidelines for STOs earlier in 2023, further advancement has been delayed amidst competing legislative priorities. Hopes were especially high during the Yoon Suk Yeol administration, as STO-related issues took precedence over stablecoins and ETFs. However, repeated postponements—such as the decision to table STO proposals during a July National Assembly meeting—have stifled progress. With a critical parliamentary session on the horizon this November, industry stakeholders eagerly anticipate decisive action on STO-related legislation.

STOs: A Catalyst for South Korea's Evolving Securities Industry

The domestic securities sector’s growing interest in STOs is not without cause. Revenue pressures from rising interest rates and an economically challenging environment have left traditional income sources dwindling. In this context, STOs emerge as a potentially groundbreaking solution, offering fresh avenues for growth and diversification.

Proper regulation of STOs could radically alter South Korea's financial ecosystem. By enabling the tokenization of assets, STOs can directly bridge small business owners with individual investors, expanding fundraising opportunities for startups and venture firms. These tokenized instruments could attract not only domestic capital but also international investments, bolstering economic dynamism.

Moreover, the surging interest in fractional investments adds momentum to STO legalization. South Korea’s fractional investment market—focused on assets like real estate, music copyrights, and artwork—already reached cumulative transaction volumes of KRW 200 billion ($151 million) by early 2022. Experts believe the future of fractional investing lies in STOs rather than traditional electronic securities. Over-the-counter (OTC) trading platforms are increasingly seen as a crucial linchpin for early STO market dominance.

Companies such as Kasa, VBrick, Funble, and SOYU are already digitalizing real estate income securities through regulatory sandbox initiatives. However, the current ban on issuers serving as distributors remains a significant bottleneck for the development of a full-fledged STO ecosystem. Leading securities firms like Shinhan Investment & Securities, Mirae Asset Securities, and Hana Securities have shown interest in collaborating with fractional investment platforms. Still, they remain constrained by the absence of clear, comprehensive legal frameworks.

This bottleneck may soon be addressed as the FSC announced it plans to license up to two OTC trading platforms for tokenized securities while designating the Korea Exchange to oversee exchange-based STO trading. Notably, securities firms specializing in small and medium-sized enterprises (SMEs) will be prioritized in the licensing process. Eight firms, including DB Financial Investment, IBK Investment & Securities, and Hanwha Investment & Securities, are positioned to benefit, with speculation around “STO beneficiaries” driving up stock prices for related blockchain and securities companies.

Global Regulatory Models: Lessons From Japan and the U.S.

Success in integrating STOs into South Korea’s financial markets depends on establishing a robust regulatory framework. This includes granting tokenized securities legal enforceability under the Electronic Securities Act and creating clear issuance and circulation guidelines for these assets. Given the broad applicability of STOs—ranging from traditional securities to investment contract tokens—examining international models may be essential.

Japan offers a compelling precedent. By incorporating STOs into its Financial Instruments and Exchange Act, the country has established a strong regulatory backbone. Japan also relies on the industry-led Japan STO Association to enforce standards, ensuring smooth collaboration between the private sector and regulators. Similarly, the United States enforces rigorous securities laws on STOs, leveraging existing regulations to maintain market integrity.

The Korea Capital Market Institute (KCMI) underscores the need for South Korea to adopt a similar approach. According to a recent report, implementing STO regulations could significantly expand the domestic securities industry, unleashing a wave of new platforms and investment products. However, this influx of innovation is not without risk. KCMI warns that increased competition, particularly from non-traditional players, could disrupt established market dynamics.

One potential solution the think tank advocates is self-regulatory frameworks spearheaded by industry participants, akin to Japan’s model. This system could balance regulatory oversight with industry expertise, allowing for a seamless transition while fostering innovation across the STO landscape.

Conclusion: Paving the Way for a Tokenized Future

As South Korea edges closer to legalizing Security Token Offerings, the nation stands at the cusp of a financial transformation. STOs could unlock unprecedented opportunities for businesses, investors, and financial institutions alike. From diversifying fundraising channels for startups to fostering a more inclusive investment ecosystem, tokenization promises to reshape the capital markets landscape.

However, realizing this potential hinges on swift and effective regulatory action. By drawing inspiration from global leaders like Japan and the U.S., South Korea can develop a legal and infrastructural foundation tailored to the unique demands of STOs. As November’s parliamentary session approaches, the stakes are high for what could be a milestone moment in the country’s financial evolution. The road forward is clear: a proactive, collaborative approach will be critical for unlocking the immense promise of tokenized securities.