Despite the controversy, FSC sticks to its 'fractional exchange' decision...what drove its screening criteria

The controversy was intense, but the conclusion did not change. After deliberating for more than a month over the preliminary approval for a token securities (STO) over-the-counter (OTC) trading platform, which had been framed as a battle between “established interests and innovative companies,” the Financial Services Commission (FSC) upheld the Securities and Futures Commission’s earlier decision to reject the startup Lucentblock. Observers say this approval result placed more weight on “who can operate the market in a stable manner” than on “who opened the market first.”

According to the Financial Services Commission on the 19th, the total scores given by the external evaluation committee to the two consortia that received preliminary approval were 750 points for the Nextrade (NXT) consortium and 725 points for the Korea Digital Exchange (KDX) consortium. In contrast, Lucentblock, which failed, received a relatively low score in evaluation items such as equity capital, business plan, and conflict-of-interest prevention framework, ending up with 653 points.

Analysts say this reflects the financial authorities’ view that STO OTC brokerage businesses are in effect to be regarded as “quasi-exchanges.” A securities industry official said, “An exchange is not a place to pick the most innovative company, but a process of selecting an organization to which the market can be entrusted,” adding, “The key would have been whether it is an organization capable of overall volume control and system risk management,” highlighting the importance of equity capital and related factors.

For the business plan, “certainty” rather than “vision” became the main evaluation criterion. Hwang Seokjin, a professor at Dongguk University, said, “A business plan is not about vision; it is about feasibility and the internal control framework.” The key, he explained, was whether long-term operating strategies, compliance systems, and supervisory response frameworks were specifically designed. In addition, because the OTC trading infrastructure is structurally prone to entangling issuance, distribution, and brokerage functions, mechanisms to prevent conflicts of interest-such as dispersed shareholding and controls over related parties-also served as major evaluation factors.

In particular, the Financial Services Commission confirmed that at its regular meeting on the 13th it also discussed the key issues raised so far: whether the current screening criteria are disadvantageous to startups, whether sandbox participants are effectively guaranteed approval or granted exclusive operating rights, and whether there was any technology misappropriation by the NXT consortium. In the end, it concluded that these controversies were not sufficient grounds to overturn the approval criteria. However, in the case of the technology misappropriation issue raised by Lucentblock against the NXT consortium, a condition was attached that the main approval review process would be suspended if the Korea Fair Trade Commission initiates an administrative investigation, effectively leaving the matter to the Fair Trade Commission’s judgment.

The financial authorities have gone so far as to distribute an unusually long, 19-page reference press release to underscore the procedural legitimacy of this preliminary approval. Nonetheless, the case has clearly highlighted institutional challenges surrounding the ecosystem of innovative companies. With a business that went through the regulatory sandbox failing to obtain full authorization, the question of how to design a “sandbox exit” has resurfaced.

A fintech industry official pointed out, “I agree with the principle that the sandbox is merely a testing opportunity, but if a business that has completed proof-of-concept is completely rejected at the authorization stage, we need to think about how to design investor protection and exit structures.” Professor Hwang argued, “The sandbox period should be shorter. Even if it is extended and reviews are conducted more frequently, renewal and screening must instead be made much more rigorous.”

Experts cite as future tasks the refinement of the “same regulation for the same function” principle and the improvement of the linkage between the sandbox and full licensing. They argue that to secure market trust, the authorities must apply the same regulations to identical investment risks and strictly examine, at the main approval stage, whether conditions are being met and whether conflict-of-interest controls are effective in practice.

Kim Kaprae, head of the Financial Law Research Center at the Korea Capital Market Institute, said, “If there is the same investment risk, we need function-based regulation that applies the same rules,” adding, “The government must faithfully play its role as a watchdog while creating a fair competitive environment.” Professor Hwang said, “We will start with a stock-mirroring method (a structure that links existing shares and tokens on a one-to-one basis), but even in the process of subdividing equity, we need to set separate review and evaluation periods and establish models that can inspire trust. By around March to April, the administrative framework under the law should be organized and the foundation for nurturing the industry should also be put in place.”

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