South Korea Enacts Seed Bills to Authorize Tokenized Ssecurity Based on Blockchain

Key Takeaways:

• The National Assembly approved the Electronic Securities Act and the Capital Markets Act amendments to allow the legalization of tokenized securities.
• The new laws formally accept distributed ledgers based on blockchain as a proper way of tracking and controlling security ownership.
• The legislation is scheduled to come into effect in January 2027, after a one-year grace period during which the industry and the regulators would prepare infrastructure.

Amendments to the Electronic Securities Act and the Capital Markets Act were recently enacted by the South Korean National Assembly and put tokenized securities under a formal regulatory framework.

These bills are an important turning point in South Korean finance. The government has established distributed ledger technology by modifying the Electronic Securities Act. It is currently defined by the law as a system where information is logged in agreement to particular standards by various participants and that unlawful deletion or modification thereof is prevented by collective management and technical precautions. This technical description is important since it enables blockchain data to be an official securities account book.

In the past, securities in South Korea were required to be registered in centralized systems which were operated by trusted intermediaries. This is altered in the new rules because the decentralized ledgers should have equal legal weight as the traditional electronic records. It implies that a record of a tokenized asset that is issued and entered on a compliant blockchain is legally binding in establishing ownership.

The Financial Services Commission (FSC) pointed out that this is not only a matter of technology, but rather a matter of something more that can be made into a tradeable commodity in what can be called security. Whereas the conventional stocks and bonds are the norm, the new framework is specifically biased towards the investment contract securities. They are holdings in which investors invest capital in a shared project and divide the gains, a type which frequently encompasses fractionate ownership of valuable property, such as real estate, fine art and even intellectual property rights.

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These securities of investment contracts are now legally allowed to be distributed under the revised Capital Markets Act. Historically, a significant number of startups in the so-called fractional investments field were present in a legal grey zone or temporary regulatory sandbox. The new law offers a long term residence to such businesses. It enables the establishment of over-the-counter (OTC) investment exchanges as the tokenized products.

The aim of this change is to assist the small and medium enterprises (SMEs) in seeking alternative means of capital raising. Firms can also securitize their assets or projects instead of having to list on the main Korea Exchange (KRX), which would require rigorous and costly requirements of listing. As an illustration, a developer may tokenize part of a commercial building and retail buyers may purchase a small part of the building in the form of a shred and earn a share of the rental revenue.

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As much as the laws provide new opportunities, there are stringent ones that go with it. The FSC has pointed out that tokenized securities remain such. This implies that they should adhere to the same disclosure and investor protection regulations as any other financial instrument. In case a company intends to issue tokens to the population, it has to file a securities registration statement, and completely disclose the underlying asset.

The separation of issuance and distribution is one of the most vital protective practices in the new law. To avoid conflict of interest the same entity would not be able to issue a tokenized security and operate the exchange in which it is traded. This is a requirement that marketplaces run by issuers will not be permitted. Rather, investors will sell and buy tokens via licensed brokerages of new OTCs.

The role of intermediaries is also dealt with in the legislation. Any company that enables the trading of these tokens without an appropriate investment brokerage license will be viewed as an illegal operator. It is a strong indication to the crypto industry that as much as the technology is being adopted, the wild-west approach of unregulated trading of tokens is not going to be adopted in the securities market.

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