[Economic View] Security Token Renaissance

[Source] https://www.edaily.co.kr/news/read?newsId=01249686635737496&mediaCodeNo=257

 [Sangjin Cha, lawyer at Alchemic Investments and vice president of the Korean Financial Lawyers Association]

The city-states of Tuscany, which included Florence, Pisa, and Siena, the centers of the Renaissance, were at war throughout the 14th and 15th centuries. Because the citizens of each city had a job, they hired mercenaries to fight the war. In particular, although Florence was a city with a developed financial industry and a flourishing Renaissance culture, it always suffered from deficits due to the costs of war. In the early 15th century, debt exceeded 70% of the city's revenue. This was a scale that could not be raised through existing taxes. So how was Florence able to raise such funds?

The answer lies in the procurement method. In Florence, there was something called Monte Commune, which, translated, means ‘public debt fund.’ Wealthy citizens of Florence lent money to the Florentine government, and the money they lent to the government formed the Monte Commune. They did not lend voluntarily, but had some kind of obligation. This is similar to requiring the purchase of national housing bonds when acquiring real estate in Korea. In the end, Florence was able to bloom Renaissance culture while covering the costs of war using Monte Commune.

The emergence of new financing methods that overcome the limitations of existing methods makes the impossible possible. In October of that year, the month after Lehman Brothers went bankrupt on September 15, 2008, Satoshi Nakamoto presented a financial ecosystem model using blockchain technology that can complement the problems of the existing financial system through a 9-page paper and introduced blockchain technology. was especially actively used in the field of financing.

In a blockchain system, participants maintain their own ledgers that are recorded every time a token is moved, and if the records in each other's ledgers are different, they are compared and the ledger of the person who holds the same records as the majority is judged to be accurate. This method makes it possible to guarantee the integrity of certain records without the need for a large institution that guarantees trust, such as the existing Central Securities Depository (CSD).

The existing securities trading system, the deposit and settlement system, initially traded on physical securities, but gradually changed to an electronic securities system. The token securities market that has just opened is expected to bring many changes to the rapidly changing corporate financing in the future.

As the economic environment changes, the demand to raise funds by issuing securities with diverse rights is increasing. In the case of central depository institutions, they have no choice but to design their infrastructure with a focus on stability, so even if legally possible securities do not fit this infrastructure, they cannot be issued. However, in the token securities system, private institutions with certain qualifications perform a role similar to that of a central depository, so it appears that more diverse types of securities can be accepted.

In fact, since the Financial Services Commission announced plans to improve the token securities system, various companies are attempting to securitize rights that were previously not securitized. Initially, the focus was on the piecemeal investment field, but there are also cases of seeking to raise funds by securitizing the cash flow of certain projects. The targets are also gradually diversifying from real estate, music, and artwork to power plant projects, vehicle purchase funds, and certain business financing. It is expected to become more active once the Capital Markets Act and Electronic Securities Act, which will become the basis for the token securities system, are reorganized.

However, the token securities system also requires certain regulations and supervision because it issues and distributes securities with certain contents to the public. Accordingly, some voices are concerned that the token securities system will only accept rights similar to existing securities in the system, and that it will be realistically difficult for non-large financial institutions to participate.

In order to revitalize the system, it is necessary to accommodate the issuance of various rights and innovative business models by taking advantage of the purpose of the token securities system, but for the long-term development of the industry, it is necessary to strike a balance with user protection. Through the balance of the two, we hope that the token securities system will become established as a Monte Commune for companies.

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