South Korean Fintechs Are Creating a Blockchain for Trading OTC Securities

A blockchain platform for the trading of unlisted securities is being developed in South Korea, according to a report in the Chosun Ilbo.

The goal is to take transactions that are now expensive, slow and insecure and make them efficient and accessible to a wider range of investors. Six local participants are involved in the project, including Koscom—the IT arm of Korea Exchange—KEB Hana Bank, Hana Financial Investment, Daejeon Technopark, Amicus Lex—a startup—and an association for accelerators. They are aiming to have the system in place by the second half of the year.

The trading of shares in smaller companies is said to be a “blind spot” in Korea, as the costs associated with the securities value chain can be prohibitive for companies not yet large enough for the Kospi main board, the Kosdaq secondary board or the Korea New Exchange (Konex). To date, unlisted shares have changed hands in an OTC manner, with humans taking orders by phone or messenger and initially recording transactions on Excel spreadsheets. The process is laborious and subject to error, while most investors are unable to access to these brokerage networks and have little chance of buying early-stage equities.

This is seen as a bottleneck in the development of innovative companies in the country. They cannot cheaply and quickly raise capital, and if they do manage to sell stock,  liquidity is poor given the lack of a diverse and active investor base.

The consortium assembled for the project believes that blockchain can help address the gaps in the market. They say it will allow for transactions to be made transparently and a record of these trades and the resulting holdings maintained in a stable, cost effective way until the shareholder registry is formally updated.

KEB Hana will handle escrow. Hana Financial Investments will provide support to the unlisted companies. Amicus Lex will offer legal advice, while the accelerator association and the techno park will do the marketing and promotion for the platform.

Koscom, which is 76.6% owned by the Korea Exchange, has been working for some time on blockchain-related developments. Last month it signed an agreement with Samsung Electronics, the three South Korean mobile carriers and two banks to develop a mobile digital identification system using the blockchain. In late 2018, it said it was developing a collateral checking system using blockchain.

The unlisted securities platform has been in the works since at least May, when Koscom received approval from the Financial Services Commission (FSC) to create the system under a so-called sandbox program, which allows for the real-world testing of innovative services by exempting them from some existing laws and regulations.

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