South Korea think tank warns against dangers of digital asset spot ETFs

While digital currency-based spot exchange-traded funds (ETFs) have garnered significant attention in recent months, experts in South Korea are raising alarm over the potential dangers of the offering to the local financial industry.

According to a report, researchers from the Korea Institute of Finance published a paper poking holes over the viability of spot ETFs, noting that the cons by far outweigh the benefits. The paper dubbed “Consideration on Approval of Overseas Virtual Asset Spot ETFs” cited the reluctance of foreign jurisdictions to approve the offerings and the significant dangers posed to retail and institutional investors.

Lead researcher Bo-mi Lee urged South Korean regulators to proceed with caution regarding spot ETFs revolving around digital currencies. In recent months, speculation that South Korea is inching toward joining its peers in the West to roll out spot Bitcoin ETFs has reached a frenzy with investors angling to join the fray upon approval.

Lee argued that the spot ETFs revolving around digital assets have the potential to “undermine financial stability” given their wild volatility levels. The oscillating prices have been shown to adversely affect the financial health of firms with significant investments in the assets.

He further submitted that an approval could upset the delicate balance of the financial ecosystem, triggering the massive movement of capital from traditional assets to digital assets. Inferring from the U.S. experience, Lee surmised that South Korea’s financial ecosystem may experience an “inefficiency in resource allocation” if regulators give the green light.

The report noted that Hong Kong and the U.S. approvals of spot BTC ETFs are less than 12 months old, highlighting a lack of data by South Korean authorities to make a proper decision on their issuance.

“At a time when there is a lack of understanding of the value of virtual assets and the price volatility of virtual assets is high, incorporating products that use these as underlying assets into the institutional system created the perception among market participants that virtual assets are proven assets,” he said.

The report was not all negative. The researchers pointed to many positives associated with digital asset spot ETFs. For starters, investors may be afforded a level of protection stemming from the presence of capital market rules and increased supervision, unlike direct investments in digital currencies.

Tighter digital currency rules for service providers

South Korea-based virtual asset service providers are expected to improve their internal guidelines for token listings in line with the incoming Virtual Asset Users Protection Act requirements.

Per the rule book, firms must review listed tokens every six months to ensure compliance with new regulations. The new playbook prescribes strict penalties for defaulting firms, including fines and the removal of operating licenses.

At the moment, the country’s Financial Service Commission (FSC) is scrambling to create new regulations to prevent a repeat of the black swan events that wiped out the holdings of unsuspecting investors in 2022.

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