Blueard's Baek Man-yong: 'STO is Finance, Not Technology'

 
Recently, one of the biggest interests in the banking and securities sectors is token securities (STO). Often referred to as 'fractional investment,' this market is expected to fully bloom by early next year. STO utilizes distributed ledger (blockchain) technology to digitize securities, theoretically opening a new market for trading and distributing almost anything, including securities, real estate, and content.

Although public understanding of this market remains low, the industry is already experiencing a wave of 'alliances and mergers.' As competition heats up for dominance in the STO market, the value of companies possessing STO infrastructure and technology is rising. Major banks and securities firms are lining up to form partnerships with these companies.

Blueard is one of the companies that has seen a significant increase in value recently. In a recent interview, Baek Man-yong, CEO of Blueard's Financial Public Sector, shared insights on the current state and future of the domestic STO market. Baek is a digital finance expert with over 20 years of experience in the financial and IT consulting fields, having held positions such as Executive Director at PwC Consulting and Vice President at A.T. Kearney Korea.

Baek began the interview by stating, "We should not view the STO market solely through the lens of blockchain technology." He believes that for the STO market to grow significantly, it must move away from the 'fractional investment' and 'blockchain-centric' approaches that have dominated the market thus far.

He pointed out that in the early stages of the STO market, discussions focused more on blockchain and fractional investments rather than the essence of token securities. He noted, "There were claims that you could fractionalize watches or luxury goods, or own a part of a building in New York." He emphasized that the starting point for the STO market is not technology but finance, stating, "We need to expand the market from merely selling fractions of assets like artworks or Korean beef to a variety of financial products and funding methods for businesses."

Currently, the legal framework for STOs is in the process of being refined, with the main laws amended and subordinate regulations being organized. The scope of business targets is also expanding from non-standard securities like artworks and real estate to include standard securities such as bonds and funds. In this context, the Financial Services Commission outlined in its 'Token Securities Policy Direction' announced on September 4 that it aims to broaden the scope of STOs to include not only fractional investments but also bonds and funds. Following the implementation of the revised Capital Markets Act and Electronic Securities Act in February next year, plans are underway to gradually tokenize private money market funds (MMFs) for institutional investors, corporate bonds, and unlisted stock trusts.

Baek noted, "There has been a perception that tokenizing non-standard securities would not be immediately profitable, but recently, securities firms have begun to shift their focus toward tokenizing standard securities." He predicts that in the initial market, large firms are likely to first approach the tokenization of standard securities that have been permitted.

Baek also emphasized the need to activate business investment contracts for the STO market to grow. Business investment contracts involve investing in a specific business rather than directly owning a portion of a physical asset, with returns distributed according to agreements. So far, most investment contracts issued in South Korea have been shared equity types, where investors collectively own shares of specific underlying assets like artworks or Korean beef.

The challenge lies in distribution. Shared equity investment contracts require addressing the transfer of shared equity in the underlying asset when securities are transferred to others. Due to legal issues surrounding the transfer of shared equity, establishing a free trading market similar to stocks has been constrained. Consequently, financial authorities are researching distribution methods for shared equity investment contracts and the review criteria for business investment contracts.

Baek explained, "For small and medium-sized enterprises or startups to attract investment, they previously had to issue bonds or sell equity. If business investment contracts are activated, they can receive investments in exchange for sharing returns instead of giving up equity." He added, "This could provide a new funding method for SMEs and venture companies."

However, since the success of future businesses will determine the investment returns of business investment contracts, investor protection and valuation are crucial. Baek stated, "Finance inherently includes products that are not stable," emphasizing that there should also be products that offer high returns in exchange for taking on high risks.

Baek anticipates that securities firms' strategies for token securities infrastructure will vary. He noted, "Companies like Mirae Asset Securities, Hana Securities, and Hanwha Investment & Securities may build their own issuance platforms and distributed ledgers, while others may use shared distributed ledgers but also develop their own systems." He added that some companies may lack the capacity or financial resources to create their own ledgers and will only use shared ledgers.

He remarked, "For smaller firms, choosing a shared distributed ledger may be more rational due to costs, but if they plan to expand into token securities and other digital asset businesses in the future, it may be advantageous for larger firms to maintain their own ledgers." This is because transitioning from issuing on a shared distributed ledger to a proprietary one may not be as straightforward as anticipated.

As relevant laws are set to take effect early next year, Baek was cautious about expectations for rapid growth in the STO market. He stated, "Realistically, there is little time left before the law takes effect, and subordinate regulations are not yet fully organized. Just implementing the token securities system will not immediately open the market." He added, "The regulatory framework for new securities to be issued as token securities must also be completed, and there are still unresolved issues that could lead to significant confusion in the early stages."

He particularly emphasized that the payment settlement infrastructure must develop alongside token securities to realize their advantages. Baek stated, "For a proper on-chain asset market to thrive, instant settlement is necessary. If trading can occur 24/7 and assets can move from wallet to wallet, the question of 'why should we tokenize this' will diminish." He concluded, "If securities are tokenized but payment settlements remain as they are, it will be difficult to leverage the advantages of blockchain."