The Three Innovations that Tokenized Securities Will Bring (Part #2)
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II. Three Innovations that STOs will Bring
INF CryptoLab expects three innovations to be brought to the society by STOs.
First is the innovation in financial products.
Through STOs, newly packaged financial products will emerge. For instance, there will be products like a 26-week fund for investing in savings schemes for 26 weeks or an investment product diversified across the top 77 KOSPI companies based on the lucky number 7. Financial products like savings accounts existed for the last 50 years. However, in 2018, the 26-week savings product launched by an internet bank, Kakao Bank, achieved massive success with 20 million cumulative accounts opened within just five years. STO enables such innovation on a mass scale. STO-based financial products, tailored to consumer needs, are expected to make a totally new impact on the market.
Secondly, there will be an innovation in securities issuance.
Previously, investing in businesses through securities meant investing in the stakes of those companies. However, regular shareholders found it difficult to exercise voting rights and to expect sufficient dividends. With STOs, a new method will emerge, allowing direct investment in businesses. Examples include investing in preferred shares of a Hwaseong Korean cow ranch, or perhaps receiving monthly dividends from parking revenue rights. Assets no one could have imagined would be able to be securitized, will be securitized through STO.
Thirdly, there will be innovation in asset tokenization.
As token securities are based on distributed ledgers, heavy assets that were previously challenging to handle or luxury items difficult for the middle class to invest in can now be divided, encouraging fractional investment. This will open new investment opportunities to the products for retail investors that were previously accessible only to institutional investors.
Figure 11. Innovation of Products
There is a possibility that the perception of “retail investors” might totally change.
Trading token securities could potentially improve the negative perception surrounding tokens in the web2 industry. Additionally, the concept of quantities like five shares of Tesla (TSLA US) or ten shares of Samsung Electronics (005930 KRX) might transform into an amount-based concept such as three million won worth of Tesla (TSLA US) or one million won worth of Samsung Electronics (005930 KRX). Finally, investment destinations recognized by company names or tickers (stock codes) could be perceived as ideas such as the leading electric vehicle company or semiconductor-related stocks.
With these changes, even marketing language around stocks might shift.
Marketing language may shift from the traditional “Hey everyone, buy Starbucks stocks. Sales increased by 10% compared to last year, and the P/E ratio is 30x, making it affordable.” to “Well, instead of a daily Starbucks coffee, invest 10,000 won in coffee tokens.” Similarly, funds might transition from “Hey, buy China Blue-Chip Fund 2. Last year’s yield was 15%.” to “You know what? For those worried about parking fees, invest in a monthly dividend-based token for Yongsan Station parking and enjoy free parking for life.”
Figure 12. Marketing Trend Change in Stocks
Figure 13. Marketing Trend Change in Funds
III. How will Korean Brokerage Firms Prepare for the STO Era?
1. Changes in Brokerage Firms’ Fundraising Methods through STOs
Brokerage firms are competing by selling the same financial products as stocks and funds. From a customer’s perspective, buying Samsung Electronics (005930 KRX) stock from one securities firm or another doesn’t make much of a difference. As a result, brokerage firms have been attracting customers by spending on marketing, reducing fees, or improving user experience.
However, this landscape could totally change with the evolution of the STO market. If a specific securities firm identifies and issues tokenized securities with competitive advantages and innovative ideas early on, customers will be able to subscribe to those products only through that firm’s platform.
When companies build their value based on the inherent value they provide, they can achieve a higher multiple and realize their true corporate worth. Present-day brokerage firms are akin to movie theaters. They all screen the same movies, prompting them to spend on enhancing customer satisfaction by installing better seats or offering discounts. This leads to a scenario where they become low-growth, undervalued companies with a meager P/E ratio of just 10x. On the other hand, Netflix competes through content. It offers exclusive content not available elsewhere, allowing it to achieve a P/E ratio of over 40x.
If brokerage firms start providing exclusive financial products through STOs that aren’t available elsewhere, the current competitive landscape will undergo a significant shift. A new competition centered around products will emerge, serving as a driving force for the development and innovation in the financial market.
Figure 14. Competition will begin on the basis of the “product” at the heart of brokerage firms
Movie theaters without exclusive content (products) spend money to satisfy customers, and that expenditure serves a one-time role and then disappears. In contrast, OTT platforms with exclusive content (products) invest in intangible assets to satisfy customers. This investment transforms into intangible assets that continuously accumulate on the platform. The accumulated intangible assets become competitive advantages and act as a company’s foundation.
In summary, with the emergence of STOs, fundraising methods will change. This implies that brokerage firms which succeed in effectively converting costs (marketing expenses) into intangible assets (investment funds) through leveraging this change could become the new leaders of the next securities market.
Figure 15. Cinema Advertisement (Emphasizing the services)
Figure 16. Netflix Advertisement (Exclusive content oriented)
Furthermore, in addition to securing a corporate network based on an IPO and generating greater profits through ECM (Equity Capital Markets) and DCM (Debt Capital Markets), there exists the possibility, through STO operations, of acquiring new corporate customers previously inaccessible, thereby generating additional revenue.
2. Current Status of the Domestic Securities Industry (Korea) for STOs
Discussions surrounding STOs in Korea commenced in 2018. However, owing to the sluggish pace of legislative action in passing associated laws, the government aims to establish distinct guidelines to foster the market. The Financial Services Commission is targeting substantial institutional implementation starting from 2024, refining specific requirements within legislations such as the Electronic Securities Act and the Capital Markets Act.
Concurrently, the Korea Exchange, Korea Securities Depository, and brokerage firms are intensifying their preparations, viewing STOs as a novel business prospect. KB Securities initiated preparations even prior to the guidelines’ announcement, engaging in consultations or partnerships with blockchain companies for Proof of Concept (PoC), followed by Korea Investment & Securities, Hana Securities, Shinhan Securities, and others. INF Consulting has solidified its status as a financial and blockchain consulting firm, managing consulting projects for all brokerage firms. Technology firms like SK C&C and Lambda256 have conducted pertinent PoCs.
All brokerage firms are launching STO-related alliances to secure promising products as quickly as possible. However, disparities exist among these firms, notable disparities in whether they are associated with banks or not. Brokerage firms under banking groups aim to dominate the market through their platforms, collaborating with banks or card affiliates to capture new investor demand. Conversely, non-banking brokerage firms are exploring strategies for customer differentiation, aiming to introduce entirely fresh investment experiences via real estate, art, crowdfunding products, and more.
3. Hana Financial Investment — The First Securities Firm to Establish an STO Platform
In November 2023, Hana Financial Investment made INF Consulting, an ITCEN subsidiary, the primary contractor tasked with constructing an STO platform, initiating a substantial phase of platform development. The reported contract value for this primary contractor reaches into the hundreds of billions of won (approximately tens of millions of USD). This selection, following preliminary consultations conducted in July for the STO platform, represents a comprehensive investment in the STO business. The estimated timeframe for platform construction spans approximately one year, aiming to cover the entire spectrum of token securities, from issuance to circulation.
Hana Financial Investment aims to capitalize on synergies within the Hana Financial Group via the STO platform. Despite Hana Bank’s leading position in the banking industry, Hana Financial Investment had displayed relatively weaker standings concerning securities firm rankings and customer base compared to its rivals. However, the introduction of token securities as a new asset could lead to significant and noteworthy changes.
As mentioned before, the construction and launch of the STO platform involves expenses in the hundreds of billions of won (approximately tens of millions of USD). The significance lies in being the first securities firm willing to incur such substantial costs while placing confidence in token securities. It is anticipated that subsequent to Hana Financial Investment, Mirae Asset Securities and KB Securities may consider STO platform construction in the future.
Figure 17. Hana Securities, Selecting INF Consulting as Primary Contractor for building an STO Platform
