Current State of the STO Market in South Korea
A tokenized securities issuance bill that was ultimately killed
TL;DR
The STO-related bills were abandoned at the end of the 21st National Assembly's term and will be reintroduced in the 22nd National Assembly. However, the process is expected to take a considerable amount of time due to disagreements between the ruling and opposition parties.
It is important to enact the law before the deadline for designating a financial sandbox for STOs expires. The speed of enactment will determine the pace of industry development.
The abolition of the STO bill has caused domestic companies to turn to overseas markets, raising concerns that the competitiveness of the domestic STO market will weaken. To overcome this, it is necessary to find a balance between regulation and innovation and lay a strong institutional foundation.
1. STO Bill That Died in the 21st Congress
"RWA," short for the tokenization of real-world assets, is rapidly gaining traction in the Web3 marketplace. In April, BlackRock, the largest U.S. financial firm, launched $BUILD, a tokenized version of U.S. Treasury bonds. This move is not an isolated industry endeavor. Many countries are actively regulating RWA through various classifications such as Security Token Offerings (STOs) and Initial Coin Offerings (ICOs). This regulatory approach suggests that RWA will become a new trend aligned with regulations rather than a standalone industry.
Amidst global developments in the tokenization of real-world assets (RWA), South Korea has also proposed a related bill and developed a reconstruction plan centered on the Financial Services Commission. Steps have been taken by regulatory agencies and industries, including step by step investments through financial sandboxes and alliances with financial companies.
However, progress in parliament has been slow since the bill's introduction. Unlike the initial goal of institutionalizing Security Token Offerings (STOs) by the beginning of this year, token securities bills have been deprioritized. Amendments to the Capital Market Act were twice presented to the Political Affairs Committee's Bill Review Subcommittee last year but were suspended in December. The bills were abandoned when the 21st National Assembly's term expired, delaying potential reforms until the 22nd Congress.
2. The 22nd National Assembly and the STO Bill
The 22nd National Assembly of South Korea began its term on May 30th and officially opened on June 5th. Similar to 21st Assembly, the majority of the seats are held by the Democratic Party of Korea and its satellite party, the Democratic Alliance for Korea. Together, they control 175 seats while the People Power Party has 108 seats. This distribution suggests that a pan-opposition-led agenda might progress smoothly, while a pan-ruling agenda could face significant challenges considering the current administration.
The first plenary session of the 22nd National Assembly was plagued by conflict between the ruling and opposition parties. The Democratic Party-led National Assembly was elected, but the plenary sessions were held in half capacity due to the boycotts from the People Power Party opposition. The ruling and opposition parties are already struggling to reach a consensus, foreshadowing considerable difficulties in regulatory procedures. Each party's first bill typically reflects its core values, and it is likely that the STO bill will be introduced and discussed only after these initial bills are finalized. Given these circumstances, the process for the STO bill is expected to take a considerable amount of time.
Furthermore, the ruling People Power Party which led efforts to enact the STO law, was defeated in the 22nd general election. Both Yoon Chang-hyun and Kim Hee-gon, the lawmakers who spearheaded the amendment, were also defeated. In addition, two-thirds of the lawmakers who co-sponsored the bill were replaced. The absence of these leading lawmakers presents a major obstacle to the reintroduction and progression of the STO bill.
Nonetheless, both the ruling and opposition parties have promised to legislate token securities in the 22nd general election. This commitment suggests that legislation will likely be pushed forward, even if it takes some time.
3. Urgently Needed Financial Sandbox for STOs
A financial regulatory sandbox in South Korea grants regulatory exemptions to fintech companies to develop and bring innovative financial services to market. Its purpose is to increase the convenience of financial consumers and revitalize the fintech industry. Sandbox approval enables businesses that would otherwise be prohibited by regulations, allowing Security Token Offerings (STOs) to enter the market.
Once designated as an Innovative Financial Service, a company can test new services outside of existing regulations for up to five and a half years. The initial designation is for two years, with a one-time extension of up to two years. This period can be extended for up to one and a half years if the company requests regulatory reform.
The biggest concern is for Kasa Korea, which was approved for the sandbox the earliest. It was approved on December 18, 2019, and is already on its second extension. This leaves a grace period of one year and six months. If STO legislation is not enacted by June 18th of next year, it will cause major disruptions to service operations.
Therefore, preparing STO-related legislation is imperative. Both the ruling and opposition parties have promised this in their general election campaigns. However, given the deadline for the designation of innovative financial services, the faster the legislation passes, the better. The speed will determine the pace of industry development and for innovative financial services to operate without interruption.
4. Industries taking a breather
As mentioned in our previous research, since the release of the Financial Services Commission's STO-related guidelines in February 2023, Korea's STO ecosystem has been led by securities firms. Each securities company has been building its own network by signing MOUs to form a 'token securities council.' For example, Daeshin Securities acquired the real estate piecemeal investment company Kasa Korea, demonstrating the intent to run a token securities business directly through technology internalization.
However, with the STO bill currently scrapped, these securities firms are facing an endless waiting period. Some securities firms have begun to reassess the budgets allocated to related projects, and follow-up projects have remained at the level of business agreements rather than creating tangible outcomes.
5. Conclusion
In the current landscape, domestic STO companies are turning to overseas markets. Buysell Standard, Funderful, and Barunson Labs plan to collaborate with Singaporean STO platform IXswap to introduce Korean blue-chip assets and K-content to Southeast Asian investors. Treasurer, in particular, is preparing to tokenize and list its wine collection, taking a targeting the overseas market first to avoid excessive domestic regulation and develop the market abroad first.
This workaround strategy underscores the lack of an institutional foundation hindering the growth of the domestic STO market. While the STO market holds long-term growth potential, ongoing uncertainty is weakening the domestic market's competitiveness.
To address this, it is urgent to enact STO-related legislation promptly. The National Assembly must heed market needs and create an institutional foundation essential for industry development. This will enable domestic companies to seek growth locally rather than turning overseas.
While regulation is necessary to protect investors and ensure market stability, excessive regulation will stifle innovation. It is crucial to find a balance between regulation and innovation, allowing the Korean STO market to advance and thrive.
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