South Korea Finalizes STO Regulatory Framework, Effective February 2024

South Korea has taken a definitive step in regulating security token offerings. Amendments to the Electronic Securities Act and the Capital Markets Act have been officially announced and are scheduled to take effect on February 4, 2024. This establishes a clear compliance pathway for issuing and trading tokenized securities.

Broadened Scope for Tokenizable Assets

A key change in the revised rules is the significant expansion of asset types eligible for tokenization. Moving beyond the initial focus on fractional investment securities, the framework now formally includes established securities such as stocks, bonds, and funds.

This opens the door for companies to tokenize equity or debt instruments on blockchain in a compliant manner, potentially enhancing liquidity and access to a broader investor base.

Refined Rules for OTC Trading Platforms

The regulations also introduce important clarifications for over-the-counter trading platforms. In addition to previously permitted non-listed stocks and non-monetary trust beneficiary certificates, debt securities have been added as an eligible asset class for trading.

Crucially, a protective threshold for retail investors has been set: the annual net purchase limit for a general investor in the STO OTC market is 100 million Korean Won. This cap is designed to manage individual risk exposure.

New Requirements for Issuers and Account Management

The new rules grant securities issuers greater autonomy by allowing them to directly manage investors' tokenized security accounts, reducing reliance on third-party intermediaries. However, this comes with stringent conditions:

  • Issuers must maintain minimum proprietary capital of at least 40 billion KRW.
  • They must employ dedicated computing professionals with expertise in account management and internal control systems.

These requirements ensure that issuers managing accounts directly possess the financial robustness and technical capability to safeguard investor assets.

The implementation of these rules next February marks South Korea's transition from a pilot phase to a regulated environment for STOs, providing a clear blueprint for integrating traditional finance with blockchain technology.