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보고서 1
ICO and STO Markets in Korea: Challenges and Opportunities [22-13]
Senior Research Fellow Kim, Kab Lae / Jul. 28, 2022
In response to rapid digitalization across global asset markets, Korea should enhance the international competitiveness of its digital asset industry while striving to gain investors’ confidence in the digital asset market. In this regard, it is desirable to adopt a two-track approach. Under this approach, Korea’s virtual asset market would gain investors’ confidence with the enactment of the digital asset law, while the issuance and trading of security tokens should be dealt with through the reform of the existing Financial Investment Services and Capital Markets Act (the “FSCMA”). For effective implementation of the two-track policy, it is necessary to closely analyze the convergence of the virtual asset market and the capital markets and devise measures to secure consistency in the regulatory scheme. 

Most Importantly, the digital asset law designed to regulate the new virtual asset market should be promptly enacted to ensure the sustainable development of Korea’s Initial Coin Offering (ICO) market. The matters to be specified in the law include the definition of an issuer responsible for disclosure of material information, the Korean version of white paper, mandatory disclosure of material changes in the white paper, classification of ICO-related unfair trading practices and strict restrictions on such practices. For sustainable development of Korea’s Security Token Offering (STO) market, features of the virtual asset market should be reflected in the reform of the FSCMA. Relevant regulatory improvements include how to catch up with the innovation of blockchain technology using regulatory sandboxes, the fiduciary duty of security token depository agencies regarding protection of customers’ digital assets, the regulation of low-price speculative tokenized securities, and improvement plans for the STO infrastructure. Also necessary is to increase the predictability of Korea’s virtual asset market by distinguishing the jurisdiction of the FSCMA from that of the proposed digital asset law. This requires mandatory procedures for determining whether a virtual asset is a security under the FSCMA.
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보고서 1
Korea’s Short-Term Financing Securities Market: its Characteristics and Implications [22-12]
Senior Research Fellow Kim, Pil-Kyu / Jul. 25, 2022
Short-term financing securities (commercial paper and short-term bonds) are issued with maturities of less than one year to meet the demand for short-term capital. Although such securities can serve as a flexible and effective financing tool, they are susceptible to market volatility. Furthermore, if the short-term financing securities market becomes tighter, it would influence the entire financial market.    

In Korea, the outstanding balance of short-term financing securities has shown a continuous growth trend to amount to KRW 313.8 trillion as of end-May of 2022. Amid a shift in regulations and market environment, the short-term financing securities market has also seen its structure changing. Accordingly, floating securities and instruments with top credit ratings have gradually made up a larger portion of the market. On the other hand, short-term bonds (STBs) have been adopted to address regulatory issues of commercial paper (CP) but they take up a small proportion due to a disparity in the regulatory scheme.

In the short-term financing securities market, one of the most prominent features is a recent surge in the weight of long-term CP. This demonstrates that short-term financing securities are replacing long-term financing instruments while acting as an effective short-term financing tool. It is notable that an excessive increase in the weight of long-term financing instruments would give rise to distortion of credit ratings, a less sophisticated trading price structure and difficulties in redemption during a rate hike cycle, thereby leading to low liquidity of financing instruments. On top of that, if volatility intensifies in the financial market, the spread of short-term financing securities would widen further, which may aggravate the interest payment burden borne by issuers of long-term CP.

This necessitates regulatory measures to ensure that the short-term financing securities market serves its intended purpose. To this end, the regulatory gap between CP and STBs should be narrowed in the short run. In credit evaluation, the limit and duration of STBs should be equally applied to CP and credit ratings should be given based on such conditions. Additionally, varied information including the issue price and returns should be provided to investors to ensure that various aspects of short-term financing securities are reflected in the pricing process. As a long-term approach, it is worth considering replacing CP with STBs. 
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보고서 1
A Feasibility Study of Introducing the Silicon Valley Bank Model to Korea [22-11]
Senior Research Fellow Lee, Hyo Seob / Jul. 12, 2022
Amid the rapid growth of the venture debt market in advanced economies including the US and Europe, venture debt plays an important role in funding the scale-up of mid- and late-stage companies. The global venture debt market has been led by Silicon Valley Bank (SVB) Financial Group founded in 1983 in the US. Against this backdrop, this article intends to conduct an in-depth analysis of the business model of SVB Financial Group and study the feasibility of introducing the business model to Korea, aiming for enhancing the qualitative competencies of Korea’s startup ecosystem.

SVB Financial Group has adopted a growth strategy under which it has forged strategic alliances with angel investors, venture capitalists and private funds in the form of equity investment and loans and offered loans only to companies eligible for equity investment by such investors. With this strategy, SVB’s venture debt business has prospered by forming a partnership with the startup ecosystem. As part of its strategy, SVB Financial Group has provided financing support tailored for the life cycle of startups. First, it classifies startups by the size of sales and arranges a nurturing service and seed funding for early-stage companies and follow-up equity investment and venture debt for those in the mid- and late-stages. Also notable is its differentiated risk control plan under which SVB offers a higher interest rate loan in smaller volume to earlier-stage companies with a smaller size of sales by setting up a credit limit of $50 million. Despite its short history, SVB Financial Group has been on a par with global financial services firms, on the back of its distinct business model and the rapid growth of the US startup ecosystem.  


With the launch of the new government, some have argued that Korea should actively embrace the business model of SVB Financial Group to create a higher-quality startup supporting ecosystem. Building upon SVB’s model, private financial services firms need to form a financial partnership with the startup ecosystem through a nurturing service for non-listed startups, equity investment, venture debt, and company analysis. However, their efforts may not be enough for the SVB model to take hold in Korea, probably due to the discrepancy in the startup ecosystem between Korea and the US. In Korea, innovative firms are highly dependent on government-sponsored financing, such as credit guarantee, and IP finance and the secondary market have not been facilitated. For the successful introduction of SVB’s model, financial authorities should gradually reduce startups’ reliance on government-sponsored financing and cultivate various venture investment schemes to encourage the private sector to supply more risk capital. Furthermore, it is necessary to facilitate IP finance, permit the issuance of independent warrants that meet certain requirements, and reform sales-related regulations to ensure that the secondary market and the high-yield corporate bond market perform well in Korea.
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보고서 1
Business Development Companies: Characteristics and Implications from Foreign Schemes [22-10]
Senior Research Fellow Park, Yong Rin / Jul. 05, 2022
A Business development company (BDC) slated to be introduced to Korea is a listed risk capital investment vehicle. BDCs are designed to contribute to creating a risk capital ecosystem through the public capital markets and offer an opportunity to make diversified investments in non-listed innovative firms. In this regard, Korea should examine similar schemes implemented in foreign countries such as the BDC of the US and the venture capital trust (VCT) of the UK to figure out how to properly operate BDCs (K-BDCs) that accommodate conditions of its risk capital market.     

The US introduced the BDC as a closed-end investment company that was allowed to invest in privately-place securities by enacting the Small Business Incentive Act in 1980. The BDCs of the US are subject to relaxed regulations, compared to ordinary registered investment funds. The UK has operated the VCT that is a closed-end, listed investment vehicle characterized by favorable tax treatment for retail investors since 1995, aiming for expanding venture capital funding for early-stage firms. How the BDC and VCT schemes have been operated varies according to features of the risk capital markets of respective countries. More concretely, the BDC of the US has evolved into a debt-focused investment vehicle while the UK’s VCT has served as an equity-focused listed investment vehicle designed to facilitate venture capital investment.        

To ensure the successful operation of the K-BDC scheme, the following aspects should be taken into consideration in terms of operational regulations, tax benefits, prevention of conflicts of interest and expandability. First, operational regulations should be established to ensure that K-BDCs are subject to a compulsory investment ratio similar to that of foreign schemes. Also, the regulations need to determine the minimum equity investment ratio and enable follow-on investment for supporting scale-up. Second, tax benefits should be offered only to equity-focused investment vehicles, for which sub-categories of investment vehicles could be defined. Third, considering that a wide range of business entities is expected to operate K-BDCs, including existing private VC funds and PE funds, asset management firms and securities firms, regulatory safeguards should be put in place to minimize the possibility of conflicts of interest that may arise from a firm operating both a private venture capital fund and a public K-BDC. Fourth, it is worth considering the possibility that K-BDCs would evolve into a listed investment vehicle that encompasses various investment strategies and target growth stages in the long run.
 
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