Will Legal Uncertainties for Security Tokens Be Resolved?

This legal vacuum acts as a major source of anxiety for market participants.

There is currently insufficient legal basis to protect and compensate investors if issues like the overseas FTX bankruptcy occur. Lee Sung-san stated, “Since legislation hasn't been established yet, the fact that it's unclear how it will be classified as an asset seems to be a major issue.”

This is seen as a step towards defining asset categories in line with global standards.

Lee Sung-san positively evaluated the opening of the entire capital market value chain, stating, “Security tokens, which previously were somewhat limited to fractional investments through sandboxes, now officially include standardized securities like stocks, bonds, and funds as assets, which is quite encouraging.”

Phase 1 of the roadmap adopts an approach that, similar to BlackRock's case in the US, starts with a private fund structure and limits participation to institutional investors. This is interpreted as an intention to control and verify risks that may arise during infrastructure construction and operation.

Lee Sung-san explained, “It limits participants purely to institutions and starts with private MMFs or private bonds with simple rights, so even if an accident occurs, it can be controlled and limited to institutions. So, it's understood as an approach to verify the infrastructure after somewhat defining the assets.” However, questions have also been raised about the potential lack of actual trading incentives.

Tokenizing government bonds holds high strategic value as a core underlying asset with low default risk. This opens up possibilities for developing various hybrid structured products by linking with DeFi's yield, staking, and lending in the future.

Lee Sung-san emphasized the potential of government bond tokenization, stating, “By using this as a fundamental base asset, we can incorporate yields, staking, and lending/borrowing from what we call DeFi to later structure various hybrid forms of assets.”

This is advantageous for forming asset classes such as accounts receivable and can contribute to revitalizing trading of unlisted stocks on distributed ledgers.

Lee Sung-san explained, “Until now, the market for security tokens, as seen in Korean STOs, was somewhat focused on tokenizing individual assets like music copyrights, Korean beef, or Hanwoo for fractional investment. But now, it means these homogeneous assets, not individual ones, can be collected together,” suggesting new possibilities.

This is expected to inject new vitality into the unlisted stock market, as the Korea Exchange listing procedure can be replaced by electronic registration review by the Korea Securities Depository.

Lee Sung-san mentioned, “Trading unlisted stocks usually requires them to be listed on a trading platform, but by putting them on-chain, they can be shared among multiple parties, and startups can gain increased liquidity for disposing of their shares.”

They foreshadow changes to the existing Capital Markets Act review system and are seen as offering many opportunities for professional market participants rather than general investors.

Lee Sung-san stated, “From the perspective of the financial authorities’ blueprint, it can be interpreted as a signal that changes the very philosophy of the system. While general investors might wonder 'What is this for?', for market players, there are aspects that can be leveraged.”

Stocks have complex rights, posing limitations for practical on-chain implementation. Therefore, the Korean Financial Services Commission and Korea Securities Depository are adopting an approach that begins tokenization with underlying assets that are easier to manage.

Lee Sung-san explained, “I believe that true tokenized stocks come on-chain only when the rights themselves can be brought over. That's why I think the FSC and the KSD in Korea probably started with MMFs and government bonds, thinking they should begin by putting up more manageable underlying assets.”

For the successful operation of tokenized assets, an efficient system for their settlement and clearing is essential. A 23-hour settlement environment is scheduled to be established within the year, and DVP (Delivery Versus Payment) and stablecoin legislation are considered key elements for institutional completion.

Lee Sung-san emphasized the importance of stablecoins, stating, “Ultimately, if there are tokenized assets, there needs to be a settlement layer, DVP, to clear and settle them. In phases 2 and 3, if the stablecoin bill is finalized in the National Assembly, it will likely move forward together.”

It is pointed out that current security tokens are handled within the existing scope of securities and are far from true public tokens. In particular, the 'prohibition of interoperability' clause specified in the guidelines is cited as an issue limiting overseas mobility.

Lee Sung-san stated, “Security tokens are still not true tokens. One of the most regrettable parts of these guidelines is the mention of 'prohibition of interoperability',” expressing hope for future 2nd and 3rd announcements to foster an environment for overseas mobility and participation of foreign investors. Currently, it operates as a permissioned network targeting institutional investors.

The Financial Services Commission has shown efforts to actively reflect industry voices in the process of establishing security token guidelines. Communication with the industry has been active through discussions and task force (TF) operations.

Park Sang-hyuk stated, “The FSC is quite open and tries to listen to the industry's voices, and from what I hear, they hold many discussions and TFs,” adding that regulatory sandboxes for infrastructure development are also needed.

This is interpreted as an intention to encourage learning about technology and business through overseas markets, under the condition of prohibiting domestic promotion and restricting targeting domestic citizens.

Park Sang-hyuk mentioned, “There was a legal commentary released recently. It says it's okay to take domestic MMFs and government bonds overseas and tokenize them abroad,” assessing this as a proactive interpretation by the financial authorities. Such a move could be an opportunity to enhance the global competitiveness of the Korean financial market.

If security token businesses are allowed overseas, there may be attempts to circumvent domestic regulations through offshore services. This could become a pathway for Korean investors to flow into overseas platforms by avoiding domestic Know Your Customer (KYC) procedures.

Seo Dong-joo expressed concern, stating, “If those companies are allowed to do business overseas, and a legal basis for it is created, they will go abroad. But the customers they encounter overseas may not be known to be Korean or not,” pointing out that a discrepancy could arise between the domestic financial authorities' policy intent and actual market trends.

With the Virtual Asset Act scheduled for implementation next year, domestic companies are expected to actively prepare for stablecoin adoption. Initially, dollar-based stablecoins are likely to be introduced first, with a Korean won version to follow.

Park Sang-hyuk said, “I expect the same. Once the Act is implemented next year, companies operating in Korea will definitely push for stablecoins,” predicting that these will likely be used more for global transactions than for domestic payments.

Local governments, especially those specializing in tourism like Busan or Jeju Island, show higher willingness to adopt stablecoin payments than the central government. These regions are suitable for piloting sandbox-style projects based on local currencies like Dongbaekjeon or Tamnajeon.

Lee Sung-san suggested, “Local governments, especially those specialized in tourism like Jeju Island or Busan, would be very interested in this. It makes sense. They would think, 'If many people use USDT stablecoin and spend a lot of money, it's good for us.' The Mayor of Busan is also discussing various things, and since it's a blockchain special zone... wouldn't it be good to try a pilot project in a sandbox format first?”

This discussion is not yet widely known in Korea, but its importance is immense.

Lee Sung-san noted, “Actually, this discussion goes beyond that level. It's about making it easier for foreign visitors to come, spend a lot of money, and spend more comfortably. So, it's a local discussion that hasn't existed in Korea before, and I think even if news came out, it would be huge, but there's almost no news, which is strange, but it is indeed being discussed.” He mentioned the lack of news in the Korean market compared to overseas cases.

To secure global competitiveness in the digital asset market, the initiation and passage of the Digital Asset Basic Act are urgent in the second half of the year. With many legislators already having proposed good bills, there is an argument for adopting a party platform or setting a clear timeline through communication with financial authorities.

Lee Sung-san expressed concern about legislative delays, citing overseas examples like Taiwan and Japan, stating, “Many committee members have already proposed good bills, so they should either adopt it as a party platform and sponsor it, or communicate with the financial sector to set a clear timeline to process it by then. If this is delayed any further, we will fall even further behind global standards.”

It is suggested that the deposit tokens and the second Hangang Project pursued by the Bank of Korea can sufficiently coexist with private stablecoins. The proposal is for private banks to issue various stablecoins based on deposit tokens and to open the market in a consortium format to start with.

Lee Sung-san emphasized early market opening and practical operation, stating, “The Bank of Korea is also currently proceeding with deposit tokens and the second Hangang Project. While it's my personal opinion, coexistence is possible. There are also CBDCs. Private banks could receive those deposit tokens and issue stablecoins, and various stablecoins could emerge in a consortium format to just try it out and improve it as they go... I think we need to start with the idea of just opening the market.”