Financial Services Commission Grants Preliminary Approval Amid ‘Geumpia’ Cartel Criticism
The Financial Services Commission held a regular meeting on the 13th, the day before the Lunar New Year holiday, granting preliminary approval for security token offering (STO) business operators to Korea Exchange (KRX) and Nextrade (NXT). Lucentblock, a startup that has been recognized for pioneering this market, was excluded.
In the startup industry, there are claims that “Although President Lee Jae Myung showed significant interest in this issue, it was ultimately powerless against the ‘geumpia’ (a term likening Financial Services Commission alumni to a mafia) cartel.” The two companies that received preliminary approval are both led by former Financial Services Commission officials. Jeong Eun-bo, chairman of KRX, served as secretary general of the Financial Services Commission, and Kim Hak-su, CEO of NXT, previously held the position of planning and coordination officer at the Financial Services Commission.
◇Financial Services Commission cites governance structure issues
Security token offerings (STOs) refer to a method of trading rights to real assets (such as real estate) and financial assets (such as stocks and bonds) in small units using blockchain technology. In South Korea, when a regulatory sandbox was established under the Special Act on Financial Innovation Support in 2018, Lucentblock founded the company and launched its service in 2022.
The company has attracted 500,000 customers to date and completed approximately 30 billion Korean won in public offerings, receiving recognition for establishing the standard for domestic STOs. After the Financial Services Commission confirmed the business viability of STOs through Lucentblock, it pushed for the institutionalization of STOs last year, with Lucentblock, KRX, and NXT applying for preliminary approval.
However, in the Financial Services Commission’s evaluation, Lucentblock ranked last. The NXT consortium scored 750 points to take first place, followed by the KRX consortium with 725 points. Lucentblock, which had demonstrated business viability, only managed to score 653 points.
The key factor that determined the outcome was the ‘governance structure’ evaluation category. The Financial Services Commission gave the lowest score, stating, “The company has a 51% stake held by its largest shareholder and special related parties, giving it the character of a private company owned by individual major shareholders.” The commission explained that since over-the-counter exchanges for STOs have the nature of market infrastructure, governance structures centered around individuals should be restricted.
Lucentblock expressed frustration, calling the decision “hard to accept.” CEO Huh Se-young stated, “My stake is around 35%, and I do not hold any shares of the ‘private investment partnership,’ which is the second-largest shareholder.”
◇President’s interest, outcome ‘unchanged’
Controversy surrounding the selection of STO business operators erupted in earnest early this year when the Securities and Futures Commission under the Financial Services Commission resolved that granting preliminary approval to KRX and NXT was appropriate. Criticism poured in, accusing KRX and NXT, which have no business track record, of “snatching the startup’s bread.”
As backlash from the startup industry grew, the Financial Services Commission postponed the processing of the STO preliminary approval agenda, which was originally scheduled for the 14th of last month. Later, during a Cabinet meeting, President Lee Jae Myung asked, “How did the security token offering permission issue go?” and the processing of the agenda was postponed again to February.
Some speculated that all three companies would receive preliminary approval, but the Financial Services Commission ultimately granted it only to KRX and NXT. Regarding this, the commission maintains that Lucentblock’s ‘sandbox operation experience’ and this ‘over-the-counter exchange approval’ are issues of completely different dimensions.
The startup industry is in an uproar. Among fintech startups, there are comments suggesting, “They seem to have processed the agenda at a time when public attention is divided due to the Lunar New Year holiday and the Olympics,” and even, “Shouldn’t we hire at least a former Financial Services Commission section chief to avoid being targeted by the ‘geumpia’?” Lim Jung-wook, representative of the Startup Alliance, said, “While claiming to nurture and support startups, they ended up marginalizing them when it was time to give opportunities,” adding, “If companies that participated in demonstrating innovative services are not protected during the institutionalization process, it will be difficult for startups to challenge innovation.”
