The Financial Services Commission held the third private-public joint consultative body meeting on the tokenization of securities and introduced a policy roadmap on the digital transformation of securities issuance and circulation on September 4.
Key Policy Directions
a) Three-phase development of infrastructure for tokenized securities issuance
A three-phase roadmap will be adopted for securities companies and the Korea Securities Depository (KSD) to develop relevant infrastructures facilitating the issuance of tokenized securities. In this regard, the tokenization of securities will include not just fractional investment securities but also conventional securities types, such as stocks, bonds, and funds.
With an update to the Act on Electronic Registration of Stocks and Bonds (“the Electronic Registration Act” hereinafter) scheduled to take effect from February 4, 2027, security tokens (or tokenized securities) are legally recognized as a digitized form of securities. Thus, the first phase of the tokenization of securities will begin from February 2027. During the first phase, the tokenization of securities will be sought for (a) privately pooled money market funds (MMFs) and bonds exclusively reserved for institutional investors, (b) unlisted stocks through a trust structure, and (c) publicly offered fractional investment securities. In the second phase, the scope of tokenization will be opened up to all publicly offered securities types. Then in the final stage, authorities will ultimately seek to establish an on-chain payments infrastructure linked to stablecoins. The second and third phase implementation will remain rather flexible depending on the outcome of the first phase tokenization process, the pace of technological innovation adopted by market participants, and the pending legislation on stablecoin.
b) Model standards on fractional investment
Fractional investment can take the form of either non-monetary trust beneficiary certificates or investment contract securities.
For non-monetary trust beneficiary certificates, a set of model standards has been prepared to allow the pooling of underlying assets with certain conditions attached (e.g. identical type of assets, provision of clear standards and purpose for asset pooling, exclusion of distressed assets, provision of information on each asset, etc.). Future receivables will also be allowed to be included in underlying assets for securitization if there are sufficient investor protection measures guaranteed.
The model standards also include various investor protection measures. First, the maximum individual subscription amount has been suggested as the smaller amount between KRW30 million and 5 percent of the total issuance volume. Second, it is also recommended that the allocation of publicly offered portion should specifically establish allocation for retail investors and set a minimum level reserved for equal distribution beforehand to ensure fairness.
For investment contract securities, the current screening process focused strictly on investor protection will be maintained. In the meantime, a further study will be carried out on the circulation of “equity sharing type” investment contract securities and the issuance of “business project type” investment contract securities.
c) Over-the-Counter (OTC) intermediaries
There will be no separate authorization process adopted exclusively for dealing with tokenized securities. Those that are already authorized to operate a financial investment business will be able to handle tokenized securities within their licensed operating areas. However, considering the significance of OTC infrastructure, a prior consultation with the Financial Supervisory Service (FSS) will be necessary to engage in the intermediation of tokenized securities transactions.
Meanwhile, authorities plan to create an additional OTC licensing unit on debt securities—alongside for unlisted stocks and non-monetary trust beneficiary certificates—since there are expectations that transactions in debt securities may grow with tokenization in the future. For investment contract securities, authorities will consider establishing an OTC licensing unit after conducting a study mentioned above.
To ensure investor protection, the maximum investment limit for retail investors is set at an annual net purchase amount of KRW100 million on each OTC exchange.
Since OTC exchanges are already required to comply with a set of operational standards to prevent, monitor, and respond to unfair trading activities, authorities will make sure to thoroughly supervise their surveillance duty. Any rule-breaking activities through OTC exchanges may be subject to sanctions under the Financial Investment Services and Capital Markets Act (FSCMA)—e.g. criminal punishment, penalty surcharge, account freeze, ban on executive appointment, etc.
d) Issuer account management entity
For tokenized securities, an “issuer account management entity” system has been adopted under the Electronic Registration Act. The function of managing securities accounts for customers, which was previously reserved only for financial companies, has been opened up to the issuing entities of tokenized securities, considering the functional stability of distributed ledger systems and the efficiency in managing securities rights, etc.
In this regard, issuer account management entities will need to meet certain standards demonstrating adequate capacity and credibility to ensure the protection of investors’ assets and the stability in issuing and circulating securities. More specifically, issuer account management entities will be required to have KRW4 billion or more in equity capital, meet specific staffing requirements (one individual for account management, one individual for internal control, and two individuals for computer and IT system), and strictly comply with the information technology and cybersecurity standards.
e) Guidelines on distributed ledger
The KSD has prepared a set of screening criteria on distributed ledger to facilitate a seamless process in the electronic registration of tokenized securities. The KSD will conduct the screening and operating test based on the guidelines when securities companies apply for a connection to the distributed ledger. Alongside the basic functional categories related to the issuance and circulation of tokenized securities, the guidelines also contain criteria on contingency plans for system errors or malfunctions (business continuity plan, etc.). Securities firms will need to make sure to maintain the same level of stability as before while incorporating distributed ledger technology into their systems.
Further Plan
The FSC plans to introduce revision proposals for the subordinate statutes of the FSCMA and the Electronic Registration Act by the end of September this year. Prior to the initiation of the first phase tokenization of conventional securities from February 2027, relevant infrastructure development will take place in close coordination between the KSD and securities companies. The newly introduced model standards on non-monetary trust beneficiary certificates will apply immediately on fractional investment taking the form of current electronic securities as well. To address the remaining issues and tasks mentioned above, the FSC will continue to have in-depth discussions and seek opinions from market participants through the operation of the private-public joint consultative body meeting.
* Please refer to the attached PDF for details.