The Financial Services Commission announced that revision bills for the Act on Electronic Registration of Stocks and Bonds (“the Electronic Registration Act” hereinafter) and the Financial Investment Services and Capital Markets Act (“the FSCMA” hereinafter) passed the National Assembly at a plenary session held on January 15. The amended legislation will pave the way for introducing and circulating security tokens.
A security token (or tokenized security) is a digitized form of a security, which is legally defined under the FSCMA and whose issuance and circulation information is being recorded and managed on a blockchain-based distributed ledger. To legally recognize distributed ledger as a securities registry and ensure stability, it was necessary to make changes to relevant laws. In this regard, the passage of revision bills at the plenary session of the National Assembly today mark a culmination of years-long legislative efforts from authorities since 2023.
Key Revision Details
a) Introducing Security Tokens: An Update to the Electronic Registration Act
Under the revised Electronic Registration Act, a clear definition is provided on distributed ledger, which is legally recognized as a securities registry, thereby authorizing the issuance of securities in the form of security tokens. The issuer of a security token will need to follow legally mandated procedures and qualifications to make notification and apply for electronic registration with the Korea Securities Depository (KSD).
With the introduction of security tokens, the management of securities accounts based on distributed ledger technology and the use of smart contracts will be promoted. The blockchain-based distributed ledger technology is widely known for its stability and security against hacking attacks, and this will promote more active use of smart contracts, especially in transactions for newly emerging types of securities, such as fractional investment products (trust beneficiary certificates) and investment contract securities, whose underlying assets and details of rights for securities holders are relatively atypical to more traditional forms of securities.
Meanwhile, since security tokens are taken as securities under the FSCMA, they will come under the purview of the same securities regulations currently in place. For instance, it would be a violation of law for an unlicensed investment brokerage service provider to engage in the business of intermediating for security tokens. In a similar vein, security token offerings should comply with the same securities registration and disclosure requirements as they apply to ordinary securities.
b) Allowing Circulation of Investment Contract Securities: An Update to the FSCMA
Under the revised FSCMA, circulating investment contract securities, which is expected to come in the form of security tokens, will be permitted through securities businesses. Investment contract securities are a form of securities recognized under the FSCMA where investors jointly make investments in business projects and gain returns based on the performance of business projects. Currently, there are investment contract securities being issued for art business projects and livestock investment.
Under the previous legal framework, circulating investment contract securities through securities businesses was prohibited as it was deemed inappropriate considering the atypical characteristics of investment contract securities. As such, it was only possible for the issuers of investment contract securities to directly recruit investors themselves. However, with an update to the FSCMA, investment contract securities will be allowed for circulation (intermediation) through securities businesses as in the case with other types of securities. This will help to enhance investor accessibility and strengthen provision of investment information for investment contract securities.
Further Plan
The revised legislation will take effect one year after promulgation (expected to be in January 2027) after establishing a relevant account management infrastructure based on a distributed ledger and preparing more specific rules for ensuring investor protection. To make sure a seamless transition and promote a vibrant security token ecosystem, the FSC plans to set up a joint consultative body composed of related organizations to carry out necessary preparations.
The joint consultative body on security token will consist of officials from the FSC, the Financial Supervisory Service, the Korea Securities Depository, the Korea Financial Investment Association, as well as various market participants from the financial investment and fintech industries and experts from academia and research institutions. The joint consultative body will have a kickoff meeting in February this year, and it will be organized into three divisions—(a) technology and infrastructure (blockchain-related), (b) regulations for issuance (securities registration, etc.), (c) regulations for circulation (disclosure, license, etc.)—to come up with more specific rules on each issue area.
* Please refer to the attached PDF for details.