The Security Token Offering (STO) market, which was anticipated to become a new growth driver in South Korea’s financial sector, is currently facing significant challenges.
Since the legislative efforts to formalize the framework for STOs failed in the 21st National Assembly, there has been little progress from financial authorities and politicians. This situation has left securities firms, which had invested heavily in the STO business, in a difficult position.
On Aug. 16, Representative Cho Jung-hoon of the People Power Party organized a seminar at the National Assembly in Yeouido, Seoul, to discuss the future of token securities. During the event, concerns were raised that if the legislative process does not gain momentum soon, the dominance in the token securities market could shift to financial powerhouses like the United States and Japan.
Ryu Ji-hae, the director at Mirae Asset Securities, expressed regret that the previous National Assembly failed to pass the necessary legislation to institutionalize token securities.
“Unfortunately, the failure to pass the token securities legislation has set us back to the beginning, requiring us to draft new regulations from the ground up,” he noted.
Ryu also emphasized that companies that were designated as innovative financial services, such as Kasa, are now required to renew their designations every six months, and new entrants face significant challenges due to the lack of regulatory clarity.
Lee Ji-eun, from the Korean Bar Association, echoed these concerns, pointing out that the prolonged regulatory uncertainty in S. Korea has driven some domestic token investment companies to consider overseas markets. She also warned that S. Korea might lose its competitive edge in blockchain technology.
Token securities refer to assets such as real estate or bonds that are divided into smaller portions and issued as tokens using blockchain technology. Unlike non-security tokens like Bitcoin, which are traded on cryptocurrency exchanges such as Upbit and Bithumb, security tokens are issued and traded by securities firms through the STO business model.
According to Hana Financial Management Research Institute, if token securities are institutionalized, the market could reach a value of $25.4 billion (34 trillion won) this year, and by 2030, it could surge to over $274.6 billion.
Since the Financial Services Commission announced its plan in Feb. 2023 to establish a regulatory framework for the issuance and trading of token securities, several securities firms have prepared for the anticipated market opening by forming specialized teams and forging partnerships Despite these efforts, the launch of the token securities business, initially expected to begin this year, remains uncertain due to the legislative setback in the 21st National Assembly.
While South Korea’s token securities market is struggling to gain traction, markets in financial powerhouses such as the United States and Japan are rapidly expanding.
According to cryptocurrency analytics firm Xangle, the United States has been issuing and trading token securities since 2017, following the introduction of comprehensive guidelines.
As of last year, 12 security tokens were being traded on exchanges in the U.S. This year, global asset management giant BlackRock introduced a fund that invests in real-world assets (RWA) in token form, and other major financial institutions like JP Morgan and Franklin Templeton are preparing to launch similar products.
In Japan, the token securities market was institutionalized following amendments to the Financial Instruments and Exchange Act in 2020. According to the Korea Institute of Finance, the size of Japan’s token securities market grew rapidly from $87.5 million (12.7 billion yen) in 2021 to $332.3 million in 2022, reaching $1.6 billion last year.
