"Public STOs Can Prevent Real Estate PF Reliance and Jeonse Fraud"

There are growing calls for the introduction of public Security Token Offerings (STO) as a method of fundraising in the real estate development market. In the current structure, which relies on project financing (PF), higher interest rates lead to increased financial costs, which in turn result in higher pre-sale prices. However, by utilizing STOs, financial costs can be reduced, thereby preventing pre-sale price hikes. Additionally, the necessity of using STOs in jeonse loans to prevent rental fraud in the lease market was also raised.

On the afternoon of the 28th, participants are taking a commemorative photo at the "Public STO-Based Digital Economy and Digital Asset Industry Development Forum" held at the Financial Investment Education Institute in Yeouido, Seoul. Photo by Seungwook Park

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Inho, Director of the Blockchain Research Center at Korea University, stated this on the afternoon of the 28th at the "Public STO-Based Digital Economy and Digital Asset Industry Promotion Forum" held at the Korea Financial Investment Education Center in Yeouido, Seoul.

The key advantage of public STOs is their ability to lower financial costs in construction projects. Project financing, which raises funds based on future pre-sale revenues, leads to increased financial expenses and higher pre-sale prices when high interest rates persist. In contrast, STOs, which issue assets in the form of digital tokens and allow them to be traded as securities, can reduce financial costs and prevent pre-sale price increases.

The STO model also lowers the barrier for individuals to invest in real estate. Traditionally, real estate development projects require investments in the hundreds of millions or even billions of won, making it difficult for individuals to participate. By dividing development assets into securities in denominations as low as 1,000 or 10,000 won and distributing them via STO, individuals can also invest in development projects. Blockchain technology ensures transparency throughout all processes, including land acquisition and permits, while also giving individuals the opportunity to earn development profits.

To this end, Professor In proposed the introduction of a pre-sale-linked STO model. This short-term, profit-oriented STO is issued at the project commencement stage of a redevelopment project and is automatically liquidated upon completion of pre-sales. Investors can trade the STO like stock if its price rises during the construction process, or hold it until pre-sales are completed to receive the principal and pre-sale profits.

Furthermore, Professor In suggested two additional models: a National Housing Welfare Fund-type STO and a National Dividend-type STO. The National Housing Welfare Fund-type model differs from the current structure in which Korea Land and Housing Corporation (LH) develops public land and sells it to the private sector. Instead, an STO is issued for the public land, and investments are made through a housing welfare fund. Through this, investors can receive land lease income, commercial rent, and pre-sale profits in the form of dividends. The National Dividend-type model tokenizes operational profit rights from donated cultural facilities and distributes profits to investors as dividends.

On this day, the use of STOs in jeonse loans as a way to prevent rental fraud was also discussed. Hong Seungpil, Professor at Hanshin University’s AI and Software College, explained, "Applying STOs to jeonse loans can prevent rental fraud caused by lack of transparency in information, such as the order of priority and the landlord’s tax delinquencies, as well as liquidity issues related to physical assets."

He added, "Introducing a jeonse deposit STO can hedge the risk of deposit non-return. If a real estate information verification system based on blockchain is established through STO, absolute trust between tenants and landlords can be built."

With such a structure, tenants can reduce the risk of not recovering their deposits. By securitizing the deposit claim, the risk of non-return can be shared among many investors. Furthermore, with STO smart contracts, it is possible to design contracts so that the deposit is returned to the tenant according to predefined conditions, such as after the contract matures. Landlords, in turn, can generate income by partially selling the STO of their property holdings, and secure the return of deposits more quickly.

The key point is the pilot project. STOs will be officially implemented starting January next year, following revisions to the Electronic Securities Act and the Capital Markets Act. The professors unanimously agreed, "It is crucial to finalize the STO structure and achieve the first sandbox-designated case before the STO legislation takes effect in January next year."

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