Increased Regulation of Fractional Investments Is Expected to Grow Korea’s Art Market Next Year
The Korean art market is witnessing new momentum. Amid the rapid growth of fractional investment in the past four to five years, the government plans to allow ‘fractional investing’ in artworks and other goods. As a result, it is possible to invest in art with a small amount of money, and the size of the art market is expected to grow with the inflow of new funds.
Korea’s Financial Services Commission (FSC) recently announced its plan to accept the formal sector of Security Tokens (STs), a digital asset issued based on real assets. The key to the policy announced by the FSC is to issue artworks, real estate, and intellectual property rights (IP) in the form of tokens to allow distribution. For example, if you have a $100 artwork, you can issue 100 $1 STs and buy and sell them on a $1 basis. Defined by the FSC, STs are securities issued in the form of tokens using blockchain technology. Unlike cryptocurrencies such as Bitcoin and Ethereum, it is a securities-type digital asset that divides rights based on real value into small pieces. In line with this, Korea’s Financial Supervisory Service (FSS) has created a Security Token Offering (STO) task force.
As a result, the artwork fractional investment market, which has been growing for four to five years, is expected to enter the system formally, revitalizing transactions and protecting investors. The FSC plans to enable the issuance of token securities under the Capital Markets Act and the Electronic Securities Act and to establish account management institutions and over-the-counter trading brokerage businesses related to issuance. Until now, electronic securities could only be issued by institutional financial companies such as securities firms. In the future, businesses that meet certain requirements will be able to collect investments in a fractional investment method and officially issue token securities.
The FSC plans to revise related laws in the first half of this year and officially introduce ST next year. If ST is allowed, the investment market that securitizes artworks is expected to grow. The artwork fractional investment market has recently been growing rapidly in Korea. According to the Korea Arts Management Service (KAMS), the amount of fractional investment in the art market last year exceeded USD 79 million (KRW 100 billion). It is estimated that it reached $43 million (KRW 54.5 billion) in the first half of last year and $71 million (KRW 90 billion) in the second half of 2022. In the second half of last year, the investment market shrank considerably due to the global economic recession and rising interest rates, but the Korean fractional investment art market expanded rapidly.
Behind this expansion, existing fractional investment did not have a legal mechanism, so transparent transactions were not guaranteed because issuance and distribution were not separated. As a result, investors could not be protected. The FSC has started to revise the law to prevent such side effects. When artwork fractional investment is classified as securities, it is subject to investor protection under the Capital Markets Act. It will also institutionalize a platform that takes charge of small investment and distribution by creating an over-the-counter transaction brokerage business.
The decision is also making a move to STO (Security Token Offering) in Korea. Art fractional investment companies, which are mostly startups, are also ready to jump into the institutionalized market in cooperation with securities firms. Seoul Auction Blue, which operates the artwork fractional investment platform SOTWO, quickly signed a business agreement with KB Securities and Shinhan Investment Securities. Seoul Auction Blue is seeking to jointly issue ST with these securities firms based on their own artworks. Seoul Auction Blue stated, “We will launch various innovative financial investment products in the future.”
The FSC’s decision is expected to lower the threshold for STO, increasing opportunities for fractional investment and increasing the fractional investment market. In addition, it can be expected that startups with the technology necessary for fractional investment will be actively introduced. An official from an artwork fractional investment company said, “Artwork fractional investment, which has been in the gray area, will enter the system,” adding, “We expect the size of the art trading market to grow as investor access improves.”
