Gov't seeks infrastructure to tokenize traditional securities beyond fractional investments

The government plans to build infrastructure to tokenize traditional securities such as stocks, bonds and funds, expanding security token offerings (STOs) beyond fractional investment products ahead of the system's scheduled launch in February.

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) unveiled the policy direction on Friday, with the ultimate goal of laying the groundwork for stablecoin payment infrastructure.

Tokenized securities are digital representations of securities issued and traded through blockchain-based distributed ledger technology. The term is frequently confused with fractional investing, but it actually describes the method used to issue a security, rather than a distinct category of investment.

The technology can thus be applied far beyond fractional investment products, allowing conventional securities such as stocks, bonds and funds to be issued and traded in tokenized form using distributed ledger systems.

The FSC, the country's top financial regulator, has been developing the regulatory framework for token securities since amendments to the Capital Markets Act and the Electronic Securities Act cleared the National Assembly in January. At its latest meeting, it presented the first detailed policy road map, complete with specific figures and a phased implementation schedule.

FSC Vice Chairman Kwon Dae-young said the government would take a strategic approach to building a new digital capital market.

"We will ensure that security tokens go beyond fractional investments," Kwon said. "We will build the foundation for issuing and trading existing financial products, such as stocks, bonds and funds, in tokenized form."

He said the government also aims to connect different parts of the capital market, from issuing and trading securities to clearing and settlement and exercising investor rights into a single digital capital market.

Under the plan, the country's tokenization initiative will be rolled out in three phases, with the first phase set to begin alongside the implementation of the law in February. It will cover privately placed money market funds and corporate bonds for institutional investors, as well as unlisted stocks and publicly offered fractional investment securities.

The second phase will expand the infrastructure to publicly offered securities, while the third phase will connect stablecoins and other digital assets as payment methods to enable on-chain settlement.

Authorities noted that the timing of the second and third phases will remain flexible, depending on the stability and efficiency of the first phase and the enactment of legislation on stablecoins.

The regulators also introduced new guidelines for fractional investment products.

Under the guidelines, multiple underlying assets can be pooled into a single fractional investment security as long as they meet certain conditions. The assets must be of the same type and carry the same rights, the purpose for pooling must be clearly defined and distressed assets must be excluded.

To strengthen investor safeguards, the authorities will set per-investor subscription caps and establish allocation rules designed to ensure that the offered securities are distributed more evenly among investors. As a standard example, the regulators proposed a limit equal to 30 million won ($22,000) or 5 percent of the total issue amount, whichever is lower.

Meanwhile, the framework will allow existing securities firms and over-the-counter trading platforms licensed to broker or trade securities to handle tokenized securities under their existing licenses. However, platforms seeking to facilitate tokenized securities trading will be required to consult with the FSS in advance.

Retail investors will face an annual net purchase limit of 100 million won per exchange.

The authorities also plan to introduce a new license category for debt securities trading that allows retail investors to participate, expanding the current system which is limited to professional investors.