South Korea Launches Fractional Exchanges to Boost Investment Opportunities

South Korea is set to launch a new exchange focused on fractional investing, marking a significant step toward the adoption of tokenized securities. The Finance Services Commission (FSC), the nation’s leading financial regulator, announced on Thursday that it will begin accepting applications in October from companies looking to obtain licenses for operating fractional asset trading platforms. This initiative is part of a broader effort to establish a legal framework for digital securities in the country.

To facilitate this development, the FSC plans to finalize amendments to the Capital Markets Act and related regulations by the end of September 2023. This move follows earlier reforms that have laid the groundwork for tokenized assets. In June, the FSC started reviewing applications from issuers of these assets after developing the necessary legal and technical infrastructure. The regulator also introduced guidelines for security token offerings in February 2023, which officially recognized digital tokens backed by traditional assets such as stocks, bonds, and real estate.

Growth of Fractional Investment Market

Fractional investment allows individuals to buy and trade portions of high-value assets, with security tokens serving as the underlying mechanism. Tokens issued on a blockchain provide legal recognition, transparency, and tradability, although they can only be exchanged on licensed platforms. This model has gained traction among retail investors seeking access to nontraditional assets with smaller investment amounts.

To ensure sustainable growth in this emerging market, the FSC will limit the number of new exchanges to two during the initial phase. The regulator cited the relatively modest size of the market, which recorded an annual trading volume of approximately 14.5 billion won ($10 million). In its licensing process, the FSC will prioritize applications from consortiums of multiple brokerages and small to mid-tier securities firms that focus on mid-sized companies. Startups specializing in tokenized securities will also benefit from a streamlined review process, with their previous experience in fractional trading platforms taken into account.

One potential applicant is Lucentblock, the operator of SoU, a security token platform dedicated to real estate fractional investment. If the company secures approval, it will become the first licensed tokenized-asset exchange in South Korea. Founded in 2018, Lucentblock issued Korea’s first security token, known as Anguk Downtowner, and has since listed 11 properties, including hotels and office buildings. SoU allows users to invest with as little as 5,000 won ($3.60), and the company plans to diversify into additional asset classes once it receives its license.

Expanding the Landscape for Tokenized Assets

Since June, numerous fintech companies have been actively pursuing licenses to issue tokenized assets. Notable applicants include FUNBLE and Kasa Korea, both of which operate digital platforms for fractional investments in commercial real estate. Additionally, Galaxia Moneytree Co., a financial services provider, runs a token-securities issuance platform focused on aviation finance.

Many of these firms have been operating under South Korea’s regulatory sandbox for security tokens. With the introduction of the new framework, regulators anticipate a broadening of the range of assets available for fractional investment. This expansion could reach beyond real estate, artwork, and music copyrights to include intellectual property and renewable energy projects.

Analysts project that the institutionalization of security-token trading will accelerate the growth of South Korea’s fractional-investment ecosystem. This development is expected to attract a diverse array of participants and create new investment opportunities across various sectors. As the country moves forward with these reforms, the potential for innovation in the investment landscape appears promising.