Stocks and Bonds to Be Tokenized...Phased Rollout Starting with Private MMFs and Corporate Bonds Next Year

[Financial News] The government will pursue the phased tokenization of funds, bonds, stocks and fractional investments in line with amendments to the law on tokenized securities, which will take effect next February. To secure both innovation and stability, it will expand tokenization beyond fractional investments to existing financial products while also strengthening investor protection and distribution systems.
The Financial Services Commission held the third meeting of a public-private consultative body on tokenized securities on the 4th at the Seoul office of the Korea Securities Depository in Yeouido, Seoul, and announced its policy direction for tokenized securities. The announcement consolidates the key tasks concerning infrastructure, issuance and distribution discussed at the first and second meetings held in March and May.
Tokenized securities generally refer to securities issued and distributed after being recorded on a blockchain-based distributed ledger. They were institutionalized in February through amendments to the Electronic Securities Act under the name “distributed-ledger-registered stocks, etc.,” and the amended law will take effect on February 4 next year.■Phased tokenization starting with private MMFs and corporate bondsThe FSC established a three-stage roadmap, judging that implementing all the functions of the existing electronic securities system in a tokenized-securities system at once would create a heavy development burden and could undermine the stability of issuance and distribution.
In the first stage, tokenization will initially focus on private money market funds (MMFs) exclusively for institutional investors and privately placed corporate bonds. Stocks will be tokenized by placing unlisted shares in trust, while fractional investment will allow the tokenization of publicly offered fractional-investment securities.
In the second stage, the tokenization infrastructure will be expanded and reorganized to cover publicly offered securities and other areas that are technically feasible, while the stability and efficiency of first-stage operations and market demand are assessed. In the third stage, an on-chain payment infrastructure using stablecoins and other instruments as payment methods will be established. The timing of the second and third stages may vary depending on the pace of technological innovation among market participants and the status of stablecoin legislation.
A pilot project will also be pursued to validate a model for tokenizing listed stocks, centered on the Korea Exchange (KRX), with reference to pilot programs by the New York Stock Exchange (NYSE) and Nasdaq.■Expanding underlying assets for fractional investment while strengthening investor protectionThe FSC also established best-practice guidelines for beneficiary certificates of non-monetary trusts to promote fractional investment. Multiple underlying assets may be bundled and issued as a single fractional-investment security if they meet requirements such as having a clear purpose and criteria for aggregation of assets of the same type and excluding distressed assets.
Assets linked to uncertain events, such as future receivables, will also be allowed as targets for fractional investment if stable legal relationships exist, the assets are expected to arise in the near future, and enhanced investor-protection measures, including credit enhancement, are in place.
For public offerings, the subscription limit per person will be set in consideration of the nature and size of the underlying assets. As a standard example, the FSC proposed “the lower of KRW 30 million and 5% of the issuance amount.” It also recommended setting minimum ratios for allocations to retail investors and equal allocations in internal rules in advance.■No additional authorization required...OTC trading limit set at KRW 100 millionNo separate authorization system will be created exclusively for tokenized securities. Securities firms and over-the-counter exchanges that already hold licenses for financial investment businesses may handle tokenized securities within the scope of their authorized business without obtaining additional authorization. However, an over-the-counter exchange must consult with the Financial Supervisory Service in advance if it intends to support trading in tokenized securities.
In preparation for changes in the bond distribution market, a new authorization category will also be established for over-the-counter exchanges trading debt securities. The annual net-purchase limit for retail investors will be set at KRW 100 million per over-the-counter exchange.
An “issuer account-management institution,” which allows a securities issuer that is not a financial company to directly manage investors’ securities accounts, must have at least KRW 4 billion in equity capital, as well as specialized personnel in account management, internal controls and information technology.
Among the policy measures, the scope of securities eligible for token issuance, the authorization categories and trading limits for over-the-counter exchanges, and the registration requirements for issuer account-management institutions will be included in amendments to subordinate regulations under the Capital Markets Act and the Electronic Securities Act, which will be issued for public notice at the end of this month. The best-practice guidelines for beneficiary certificates of non-monetary trusts will apply immediately to fractional investments currently structured as electronic securities.
Kwon Dae-young, vice chair of the FSC, said, “We will not allow tokenized securities to remain limited to fractional investment. Through a strategic and phased approach, we will build the foundation for issuing and trading existing financial products, including stocks, bonds and funds, in tokenized form.”

[email protected] Lee Jeong-hwa Reporter