[Delio] South Korea issues guidelines on crypto as securities. New crisis or a new opportunity for the investment industry? | Exclusive Korean crypto market insights
On February 6, South Korea announced guidelines outlining which specific cryptocurrencies will be subject to the same rules as financial instruments.
As Bitcoin and other digital assets have dominated the news across the world of late, the crypto ‘fever’ is none more so evident than in South Korea. In fact, according to local media outlet BlockMedia’s data, domestic cryptocurrency trading volume in January reached KRW 101.8 trillion ($80,770 million), which is up 57.1% from the previous month. The average daily trading volume was accumulated at KRW 3.287 trillion ($2,608 million).
Amid the technology innovation pace, Korea took another step further in the digital asset industry’s development by fully legalizing STO and issuing guidelines on crypto as securities on February 6. The move aims at the continuous evaluation of digital assets and the creation of thorough laws for the local industry.
Today, we take a deep dive into the recently released K-STO, the reaction of the local digital asset enthusiasts, and the major challenges it brings.
Before moving any further, let’s find out about STO first.
What is STO?
A security token offering, or STO, is understood as the process of issuing coins or tokens for a stakeholder to invest for future profit. These assets ensure investors the right to future dividends.
The background of Security Token Offering
In 2017, the demand for participation in Initial Coin Offerings (ICOs)* increased prices leading prices for cryptocurrency to skyrocket. In an unregulated environment, Ponzi schemes (a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors) proliferated among investors, and many projects were riddled with red flags, leaving investors unprotected and victimized. A new alternative for raising funds while avoiding harm was the Security Token Offering (STO), which raises funds through security tokens.
*ICO represents a form of crowdfunding for a crypto-related project in its pre-launch stage. In an ICO, a company is able to raise funds for a new product or service by selling a new crypto token to interested investors. The tokens often have some sort of utility within the future product.
The rise in popularity of asset tokenization bridges the gap between old-fashioned and new capital markets. Startups raise money through token sales on the blockchain, where they sell their own digital tokens. Investors place a wager on the usefulness and value of the digital tokens they purchase. Unlike, IPO which stands for Initial Public Sharing, anyone can participate in an ICO.
The concept of security tokens emerged in 2018 when the U.S. Securities and Exchange Commission issued a statement stating that the issuance of securities in the form of cryptocurrencies must follow procedures and regulations set forth in law.
The rise of the securities tokens offering in South Korea
In light of the current market state, it is anticipated that security token offerings will bind the traditional financial and cryptocurrency industry, paving the way for revolutionary advancements in investing options generally.
From the blockchain perspective, tokenized securities are merging with technological advantages, providing stakeholders with security supported by regulatory structures. Unlike the traditional financial system, security token offerings back participants with investment smart contracts, ensuring that all parties comply with their obligations.
The Financial Services Commission (FSC) of South Korea said that blockchain-based tokens would be considered and governed as securities in case they meet the criteria outlined in the nation’s Capital Markets Act. The Capital Markets Act defines “securities” as financial investment instruments that do not require investors to make additional payments on top of the original investment. The proposal for the Digital Asset Act recommended renaming virtual assets, which includes cryptocurrencies and non-fungible tokens (NFTs) is yet to be released.
Interesting to know!
For easy understanding, FSC draws a parallel between the securities concept and the securities issuance form comparing the first one to the “food” and the second one to the “bowl” that holds the food. Below we summarize the 3 key points.
- The food does not change no matter what kind of bowl it is served in. In other words, the essence of security does not change by changing the form of issuance.
- Anything can be used as a bowl to hold food, meaning that certain legal effects are required to protect investors.
- Different types of food may require different bowl sizes and shapes. In particular, in the case of small-scale issuance of atypical securities, existing electronic securities that are centrally registered and managed electronically through securities companies are not suitable, and new issuance forms are required.
It’s worth mentioning it’s still in the guideline stage. To make it as simple for you to understand, we’ll just go over the important points as follow.
Security tokens guidelines summary
Blockchain technology will be fully legalized to digitize rights and bring them into the financial system.
Financial Services Commission
On January 19, the Financial Services Commission announced that it has decided to allow the digitization of securities using blockchain technology and bring it into the system. The further steps to amend the Electronic Securities Act to recognize security tokens in case they have corresponding similarities cited in the Capital Market Act*.
*The Capital Market Act articles are designed to improve the regulation of Korean capital markets by consolidating various statutes which used to govern the financial industry by type and improving their regulation and supervision.
Smaller issuers that do not meet the requirements may nonetheless offer their securities through securities companies. When issuing STs, all sellers are required to follow the same requirements for issuing other securities and produce securities registration statements and investor protection measures.
The FSC stated that each case would evaluate whether a cryptocurrency or other digital asset have security-like properties. The FSC also stated that conducting such evaluations in accordance with the rules will be the responsibility of the issuers and brokers, such as crypto exchanges.
Moreover, the local regulator plans to launch a digital stock market for Korea Exchange (KRX) as a pilot. The listed security tokens will subsequently be converted to electronic securities since big offers with many investors participating cannot be handled by distributed ledger technology.
South Korea Token Securities Market Status
The token securities regulation announced in Korea is expected to be regulated in a way that does not deviate significantly from the laws and regulations of major overseas countries.
In the case of Korea as well, regulations are proposed to determine whether the issuer returns to the investor as a security if there is a high possibility that it will be considered as a security. Moreover, tokenized digital securities are likely to be securities if it has equity rights in business operations, dividends based on business performance, or claims for the distribution of residual assets.
On the other hand, if there is no issuer or no one to fulfill the obligations corresponding to the investor’s rights, if it is issued for the purpose of maintaining a stable value to be utilized as a payment or medium of exchange and does not promise to be redeemed, and if it represents only a share right in a real asset and there is no promise of the issuer’s role in increasing the price or value of the shared object, it is unlikely to be a security.
New crisis or a new opportunity?
Once we’ve covered the security tokens guidelines “shell”, let’s take a step back and see the actual pros and cons of the STO guideline. We will start with the pros.
1. As token securities enter the system, it is expected to become a safer market from an investor protection standpoint.
2. It is expected that it will be easier to invest in real estate (buildings), which have high barriers to entry such as artworks, from cryptocurrencies that have lost credibility due to recent exchange problems and the WEEMIX meltdown, to real estate (buildings) with large funds and heavy cash flows and poor exchange rates (Token Issuance Diversification).
1. If there is a possibility of being issued and traded in the form of digital assets and recognized as securities (ex. Ripple, etc.), investment value and autonomy may decrease due to regulatory use.
2. Due to the real asset-based nature, security tokens can be valued and may not be volatile.
3. In theory, all real assets can be issued as security tokens, but only assets that can be regulated as they enter the system can be issued as tokens (there are more restrictions on who can issue tokens than when they are classified as digital assets).
Ahead of the recent announcement of security token offering guidelines, among local digital asset investors concerns arose over the coins listed on the exchange that might be delisted due to the falling out of the transaction support.
Another concern that investors are focused on is that the Financial Services Commission established an issuance and distribution system and allowed issuers other than securities firms and banks. However, due to issues such as ease of use for existing customers of securities firms and banks and difficulties in meeting regulatory standards and establishing credibility for new issuers, securities tokens are likely to become one of the centralized trading markets.
Moreover, the trading targets are expected to be mainly startups that do not meet the listing requirements of KOSPI and KOSDAQ, Korea Stock Exchange, and rely on OTC trading, real estate such as buildings, real estate PF related to implementation and development, crowdfunding, etc.
One of the biggest concerns for the market is how much it will be intertwined with cryptocurrencies and exchanges Contrary to investor sentiment that emphasizes innovation, the guidelines suggest that securities token trading will eventually be centered on securities companies and banks.
Considering everything mentioned above, rather than controlling and restricting the blockchain industry by regulating the virtual asset market and virtual asset operators, we believe that using regulation as an opportunity to support and provide guidelines to help them settle into the existing financial market will be a way to protect investors and increase the competitiveness of the domestic financial market.
The head of the Financial Supervisory Service, Lee Bok-hyun, has stated that he will hold a briefing session by the end of February to coordinate and unify the criteria for judging the securitization of digital assets. Crypto enthusiasts also expect that a clear distinction on whether or not to judge securitization, which can be judged differently depending on many variables, will be made as soon as possible so that we can lay the groundwork for a security tokens market.
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