Korea Should Tokenize Government Bonds Before Equities: Legal Expert

Professor Nam-goong Ju-hyeon of Sungkyunkwan University Law School recommended on April 15 that South Korea’s government tokenization roadmap should prioritize government bonds before equity securities, citing distinct legal challenges for each asset class. The recommendation was made during the Korean Corporate Law Association Spring Conference held at Yonsei University Law School in Seoul’s Seodaemun District.

The Financial Commission has announced plans to develop a tokenization roadmap covering government bonds, equities, and money market funds (MMF). Professor Nam-goong’s intervention addresses the sequencing of that rollout.

Rationale for Bond-First Approach

According to Professor Nam-goong, government bonds should precede equity tokenization because of how each asset’s legal characteristics interact with blockchain infrastructure. “Government bonds are debt securities, so if trust is permitted, the only legal issue becomes bond transfer mechanics—the underlying asset itself does not transfer,” he explained. “Equities, by contrast, involve voting rights, so token transfer alone does not resolve the question; governance and decision-making mechanisms must be designed alongside tokenization.”

While Professor Nam-goong stated that equity tokenization is technically possible, he noted that current Korean corporate law does not permit share fractionalization below one share, creating a separate implementation barrier.

Legal Framework and Trust Mechanisms

Professor Nam-goong outlined the core legal challenge in RWA tokenization: the mismatch between token transfer on-chain and actual rights transfer off-chain. He cited real estate as an example: under Korean Civil Law Article 186, registration is required for property rights transfer, so token transfer alone does not convey ownership.

Trust mechanisms offer a solution through what he termed the “property conversion function” of trusts. Article 78 of the Trust Act permits all trusts to issue beneficial certificates. However, Article 110 of the Capital Markets Act restricts trustee beneficial certificate issuance to monetary trusts, creating a legal inconsistency for non-monetary asset tokenization. The key advantage of trust-based RWA, Professor Nam-goong noted, is bankruptcy remoteness—trust property is protected from the trustee’s insolvency risk.

Recent Korean Legislative Changes

South Korea amended the Electronic Securities Act and Capital Markets Act in January 2024 to accommodate distributed ledger technology. The Electronic Securities Act now legally defines distributed ledgers as information systems managed by multiple participants with tamper-proof protections. The amendments created the concept of “distributed ledger-registered securities” and established an “issuer account management institution” system, allowing RWA issuers to register securities directly on distributed ledgers without intermediaries.

The Capital Markets Act amendments removed a provision that had limited investment contract securities to disclosure and insider trading rules. This change now extends full capital markets regulations to investment contract securities, enabling multi-investor trading of real-asset-backed RWA within the capital markets framework.

Global Market Context

Professor Nam-goong noted that the global RWA market is growing significantly, with 2030 projected as a major expansion point. BlackRock’s BUIDL fund surpassed $1 billion in assets under management within one year, exemplifying institutional adoption. However, global market development has centered on debt assets—particularly government bonds and bond fund beneficial certificates—rather than equity tokenization.

International Legislative Models

Professor Nam-goong highlighted Japan’s approach as most directly applicable to Korea. Japan’s 2019 Financial Instruments and Exchange Act amendment introduced the concept of “electronically recorded transfer rights” and reclassified them as Type 1 securities, thereby strengthening regulatory requirements. This created a tiered framework: direct equity and debt tokenization, reclassified securities (Type 2 to Type 1), and other assets—allowing differential regulation based on investor protection needs.

The European Union’s Markets in Crypto-Assets Regulation (MiCA) excludes crypto-assets classified as financial products from MiCA scope and instead applies national law. The EU’s Distributed Ledger Technology Pilot Regime, operational since 2023, leaves judicial effects of distributed ledger assets to member state law, allowing countries like Germany to recognize electronic record-based registration.

The United States is advancing the Financial Innovation and Technology Act (FIT21), which classifies digital assets into three categories—digital commodities, investment contract assets, and permitted payment stablecoins—allocating jurisdiction between the SEC and CFTC. Securities-type RWA would likely fall under investment contracts or securities classification.

Securities Classification and Regulatory Gaps

Professor Nam-goong explained that South Korea’s classification follows the U.S. Howey test for investment contract securities. The MusicCow case in April 2022 marked the first application, establishing de facto standards for fractional investment products entering the capital markets framework: segregated reserve deposits, physical infrastructure, specialized personnel, restricted marketing materials, and dispute resolution mechanisms.

However, securities classification occurs through post-hoc evaluation rather than pre-approval, reducing business predictability. Regulatory gaps exist at the boundary between securities and non-securities RWA—including real-asset-linked stablecoins, hybrid tokens, and governance tokens—creating potential regulatory arbitrage incentives.

Tokenization of Traditional Securities

Global RWA markets have grown around debt assets, but equity tokenization has progressed slowly domestically and internationally. Equity is not merely a property right but represents capital asset value and carries personal and relational rights requiring governance solutions. Korean company law does not permit share fractionalization below one share in current practice.

Listed equities face an additional constraint: electronic registration is mandatory, which precludes distributed ledger issuance under current settlement frameworks. Unlisted equities permit optional electronic registration, creating formal possibility subject to legal review, though separate legislation is required.

Government bond tokenization typically occurs indirectly in global markets—through tokenization of MMF or bond fund beneficial certificates rather than direct debt tokenization. South Korea could similarly enable indirect tokenization of government bond-focused MMF beneficial certificates through distributed ledgers, though Article 110 of the Capital Markets Act’s monetary trust limitation may require phase-two legislative review for direct government bond trust beneficial certificate issuance.