According to Bloomberg, cryptocurrency trading is now bigger than trading in traditional equities and the number of crypto investors rose in the last year by over 21% to reach 15% of South Korea’s population. Real World Asset (RWA), which refers to a digital token representing fractional ownership in physical assets such as real estates or bonds, has become a hot keyword in the crypto scene. South Korea has not been an exception. South Korea is emerging as a key player in the global Web3 ecosystem, with RWA tokenization driving significant growth. According to the Korea Web3 Market Guide by Tiger Research, FACTBLOCK and Hashed, RWA tokenization is creating new opportunities by enabling digital ownership of physical and intellectual property. Amid domestic regulatory challenges, Korean participants are expanding globally, offering international investors access to high-quality assets and intellectual property.
RWA vs. STO
Real World Asset (RWA) tokenization and security token offerings (STOs) represent two significant developments in the integration of blockchain technology with traditional finance. Although they share similarities, they differ in purpose, structure and regulatory treatment, with these distinctions carrying implications for their use and global adoption. RWA tokenization involves converting tangible or physical assets - such as real estate, precious metals or intellectual property - into digital tokens that can be traded on blockchain networks. This process enhances liquidity, enabling fractional ownership and greater accessibility to high-value assets. For example, a property worth million US dollars can be tokenized into smaller digital units, allowing multiple investors to participate in its ownership. The focus of RWA tokenization lies in improving the liquidity and tradability of traditionally illiquid assets without necessarily changing their core nature. In contrast, STOs are a blockchain-based fundraising mechanism. Companies issue digital tokens representing ownership in assets such as equities, bonds or other assets. These tokens are considered securities under financial regulations, requiring the issuer to comply with the associated legal frameworks. STOs aim to blend blockchain's efficiency with the regulatory oversight of traditional securities markets, providing investors with legal protections and compliance assurances.
One key distinction between RWAs and STOs lies in their regulatory treatment. Tokens issued through STOs are explicitly classified as securities, which subjects them to rigorous securities laws in most jurisdictions. For example, in the United States, the Securities and Exchange Commission (SEC) mandates that all STOs comply with federal securities laws, ensuring robust investor protection. Conversely, RWA tokens are not always classified as securities. Their regulatory treatment depends on the structure of the token and the rights it confers to the holder. If a tokenized RWA functions more like a utility or provides fractional ownership without promising returns, it may not be subject to securities regulations.
In practice, RWA tokenization primarily focuses on enhancing asset liquidity, making it an attractive option for democratizing access to traditionally exclusive investments. STOs, on the other hand, are tools for raising capital and are often used by startups and companies seeking to combine the benefits of blockchain technology with legal protections. Understanding these distinctions is crucial for participants in the digital asset ecosystem. Both RWA tokenization and STOs offer transformative opportunities, but their different regulatory requirements and purposes necessitate careful consideration for compliance and strategic implementation. As regulations evolve globally, the interplay between RWAs and STOs will continue to shape the future of blockchain-based financial innovation.
STO landscape in South Korea
South Korea is actively developing a regulatory framework for STOs to integrate blockchain-based securities within its financial system. In February 2023, the Financial Services Commission (FSC) unveiled guidelines to permit the issuance and distribution of security tokens under the Financial Investment Services and Capital Markets Act (FSCMA). The FSC announced the “Measures to Overhaul Regulations to Permit Issuance and Circulation of Security Tokens” to embrace the demand for issuance and trading of various securities utilizing distributed ledger technology. These guidelines define "security tokens" as digitized securities utilizing distributed ledger technology and affirm that existing securities regulations apply to them and, also, provide criteria for determining under what circumstances certain digital assets may qualify as securities under the FSCMA and become security tokens. This involves treating security tokens as electronic securities under the Act on Electronic Registration of Stocks and Bonds and introducing over-the-counter trading brokers for specific securities.
South Korea's tokenized securities framework under the above guidelines is distinctly different from international practices, particularly in its exclusive reliance on private blockchain systems. While tokenized RWAs in markets like the US and Singapore often operate on public blockchains, benefiting from transparency, accessibility and multi-chain interoperability through platforms like Ethereum, South Korea has chosen a more controlled approach. The country's financial authorities prioritize private blockchain use, aligning with existing regulations and emphasizing limited access to ensure greater oversight and security. In terms of regulatory and accountability mechanisms, international RWA platforms commonly adopt dual recording systems and appoint financial institutions as transfer or record-keeping agents to maintain accuracy and accountability. In contrast, South Korea’s STO framework depends on issuers or account management institutions to guarantee transaction integrity, closely mirroring traditional securities structures. This private blockchain-based model underscores the country's cautious stance toward adopting more open, decentralized technologies. The STO guidelines of South Korea aim to establish a legal framework for the issuance and distribution of tokenized securities - investment products that securitize small-scale assets and various cash flows - while ensuring the protection of investors' property rights. Achieving this requires amendments to relevant laws, such as the Act on Electronic Registration of Stocks and Bonds and the FSCMA, with proposed revisions currently submitted to the National Assembly. However, even before these legal amendments are enacted, the FSC may allow the issuance and distribution of investment contract securities and beneficiary certificates by designating them as innovative financial services under the Financial Regulatory Sandbox, provided their innovativeness is recognized.
Subsequently, there has been one case which was designated as an innovative financial service through the Financial Regulatory Sandbox. A Korean FinTech company applied for designation as an innovative financial service under the Financial Regulatory Sandbox, following the FSC's guidelines. The application pertains to a financial instrument structure enabling fractional investments by issuing trust beneficiary certificates backed by receivables. These receivables represent revenue shares from lease contracts for aircraft engines, with corresponding tokens mirrored on the blockchain. In this structure, the company:· Acquires aircraft engines via a special purpose vehicle (SPV).
· Entrusts the engines to a trustee.
· Issues trust beneficiary certificates by registering them on an electronic registry.
· Distributes these certificates to investors through a distribution platform.
The certificates allow investors to share in the revenue generated from leasing aircraft engines. This service is noteworthy for providing a secure, innovative investment opportunity for retail investors, extending fractional investment options beyond traditional assets like real estate, artwork and music copyrights. The case above serves as an encouraging example of approval as an innovative financial service. However, relying on such designations for each STO presents significant limitations. The lack of legislative progress has delayed the full integration of STOs into South Korea's institutional framework. While financial institutions have prepared for the adoption of security tokens, the absence of formal legislation continues to create obstacles.
Still, South Korea is progressing toward a comprehensive regulatory environment for STOs, aiming to balance innovation with investor protection. To further develop South Korea's STO ecosystem, it is essential to focus on creating a more flexible regulatory framework that supports innovation while ensuring investor protection. Introducing pilot programs that test the use of public blockchain technologies in a controlled environment could help identify practical challenges and opportunities for broader adoption. Additionally, fostering partnerships between traditional financial institutions and blockchain start-ups can drive the development of diverse STO products, such as fractionalized investments in untapped asset classes. By encouraging a more inclusive and dynamic approach, South Korea can position itself as a leader in the global tokenized securities market, as well as broader digital asset ecosystems.
This article first appeared in Digital Bytes (11th of December, 2024), a weekly newsletter by Jonny Fry of Team Blockchain.