South Korea’s Financial Services Commission said the licensing process itself was carried out fairly, while sharing the frustration Lucentblock may have felt after failing to win preliminary approval for a fractional-investment over-the-counter exchange.

At an annual parliamentary audit of the FSC by the National Assembly’s Political Affairs Committee on Wednesday, Democratic Party lawmaker Min Byung-deok raised the Lucentblock case and asked whether regulatory sandbox operators have a structure that properly recognises their demonstration results even at the institutionalisation stage.

Min said, “Lucentblock ran a sandbox for 4 years targeting 500,000 citizens, and is a startup that pioneered the fractional investment market without a single incident.” He added, “Yet the startup was dropped in the institutionalisation and licensing review.”

Lucentblock has operated the real estate fractional investment platform “SOU.” The company and related industry said cumulative membership is about 500,000 and cumulative investment amounts to 30 billion won. Since being designated an innovative financial service in 2021, it has conducted demonstrations under the sandbox for issuing and distributing real estate profit securities.

The FSC set an operating plan last September to newly license up to 2 fractional-investment OTC exchanges, and accepted applications from Sept. 23 to Oct. 31 that year.

Three applicants applied: KDX, in which Korea Exchange participates; NXT Consortium, whose largest shareholder is Nextrade; and Lucentblock. The cap of up to 2 was not a legal limit but a policy standard set by the FSC in consideration of investor protection and market efficiency, among other factors.

The FSC then granted preliminary approval on Feb. 13 to NXT Consortium and KDX, which received high evaluation scores from an external evaluation committee at the Financial Supervisory Service. Lucentblock was excluded from the preliminary approval recipients.

Min said the process did not sufficiently use procedures under Article 21 of the Special Act on Support for Financial Innovation to transition innovative financial operators into the institutional system.

Under the current Article 21 of the Special Act on Support for Financial Innovation, when an innovative financial operator applies for formal authorisation, the Financial Innovation Review Committee “may present” to the FSC and others its opinion on whether licensing requirements are met, taking into account demonstration results. The provision does not require applicants to go through the committee.

FSC Chairman Lee Eok-won (이억원) also addressed this point, saying, “It can be done by the innovation committee, and it is done based on judgment,” indicating it is not mandatory.

Min also raised issues over the screening process for the operators that received preliminary approval and the suitability of their business plans. He cited their staffing and claimed there could be so-called preferential treatment for former officials, and asked whether evaluations of business models were conducted in line with the purpose of the licences.

He specifically submitted related evaluation materials and demanded steps to create an opportunity for Lucentblock to be reviewed again based on its existing demonstration results.

Lee maintained the view that there were no issues with the existing licensing review itself.

“The procedure was fair, and we provided sufficient notice of the licensing method after collecting industry opinions,” he said. He added, “I empathise with the frustration an innovative entrepreneur may have felt,” and said he shared the situation Lucentblock faces.

The issue of Lucentblock trying again has been raised since before the audit. In July, Min proposed to the FSC a plan to give Lucentblock an additional chance to apply for preliminary approval separately from the full-licensing procedures for KDX and NXT Consortium.

Park Yong-jin, vice chairman of the presidential Regulatory Rationalisation Committee, also publicly said in August that Lucentblock needs to be given a chance to try again.

KDX and NXT Consortium have currently applied to the FSC for full licences as of August. NXT Consortium also launched a preparatory corporation last month, “Nexchange,” to operate a fractional-investment OTC exchange.