Fractional Investing Has Electronic Securities Too. What Sets Tokenized Securities Apart?

South Korea’s digital securities market is coming into clearer focus ahead of the February launch of its tokenized securities, or STO, framework. The Korea Exchange is set to open an electronic-securities-based market for fractional investment products, while over-the-counter markets for tokenized securities are also scheduled to launch. That is putting the spotlight on how tokenized securities can carve out an edge of their own.

The Korea Exchange plans to open a new securities market for fractional investment products on Nov. 16. Investors will be able to trade fractional investment products issued in the form of electronic securities and backed by non-standard assets such as artworks and Korean beef cattle through existing brokerage accounts.

Financial authorities said on Sept. 4 that starting in February they will expand the scope of tokenized securities beyond fractional investing to existing financial products such as money market funds, privately placed bonds and unlisted shares. The plan is to gradually connect the framework to public-offering securities and stablecoin-based on-chain payments. In other words, tokenized securities are meant to extend across the broader capital market rather than remain confined to fractional investing.

Within fractional investing, the key challenge is distinguishing tokenized products from existing electronic securities. Once the Korea Exchange market opens, investors will be able to trade fractional investment products using ordinary securities accounts alone. Results on whether two over-the-counter exchanges for tokenized fractional investment products will receive full authorization are also due in the fourth quarter. From next year, that would leave an exchange market based on electronic securities and an over-the-counter market based on tokenized securities operating side by side.

24-Hour Trading and Small-Ticket Investing Alone Have Limits

Industry participants say that simply changing the issuance method from electronic securities to tokenized securities is unlikely to create a meaningful difference that retail investors can feel.

For retail investors, what matters more than whether an instrument is an electronic security or a tokenized security is which asset they are investing in and how much return it can generate, according to a financial industry official. An electronic securities market could also offer longer trading hours, while small-ticket investing is already possible through mechanisms such as fractional trading.

Securities firms expanding their tokenized securities businesses are making a similar point. At DB Financial Investment, an official said 24-hour trading and fractional investing can already be implemented with existing electronic securities. A different issuance method does not change a product’s return or investment value.

That leaves tokenized securities needing to prove they can bring to market products that are difficult to supply through the conventional securities market, or show they can manage rights and settlement information tied to real-world assets more efficiently.

Differentiation Through an 'Asset Department Store'

Fractional investment platforms say the competitive strength of tokenized securities will come from product diversity and rights management tailored to real-world assets.

Tessa, an art fractional investment platform, said non-standard securities vary by issuer and product in dividend and liquidation methods as well as investor decision-making structures. That makes them difficult to fit into a standardized exchange market. Tokenized securities, by contrast, can record rights relationships on a distributed ledger and design dividend and liquidation structures according to each product’s characteristics. That makes them relatively more flexible in accommodating a broad range of non-standard assets.

Another advantage is that they can lower entry barriers for businesses that repeatedly issue products on a project-by-project basis. In cases such as solar power plants, where securities are issued for individual projects, using an over-the-counter tokenized securities market may be more efficient in time and cost than meeting exchange listing requirements and procedures each time.

Kim Hyung-jun, chief executive officer of Tessa, said the tokenized fractional investment market could eventually become like a department store of assets. In a single market, investors would be able to compare and invest in artworks, solar power and other products from multiple issuers, even when the underlying assets and return structures differ.

Transparency in Rights and Settlement Is Critical

Stockeeper, which operates the Korean beef cattle fractional investment platform Bankcow, highlighted the ability to tightly connect underlying asset information with investor rights.

Investment contract securities tied to cattle have a clear life cycle, from calf purchases to breeding, shipment, sale and settlement. Because the condition of the underlying asset, investor-specific rights and settlement details must be managed continuously, tokenized securities infrastructure can link the related information within a single digital system.

Industry analysis also suggests the success of the tokenized securities market will depend less on blockchain technology itself than on what kinds of products and services it supports. Beyond longer trading hours and small-ticket investing, both of which are possible with existing electronic securities, market competitiveness will hinge on whether tokenized securities can lower issuance costs for non-standard assets and manage rights and settlement structures transparently.

Ahn Jae-hyun, chief executive officer of Stockeeper, said investors will likely feel the difference through more transparent rights management, faster and clearer settlement, and richer information on underlying assets. It will also be important how broadly the market can expand the range of tradable products.