South Korean researcher sees risks with spot crypto ETFs

A recent report from the Korea Institute of Finance cautions against introducing spot cryptocurrency exchange-traded funds (ETFs) in South Korea, arguing the risks outweigh potential benefits at this time.

Bo-mi Lee, a researcher at the institute, analyzed the recent approvals of spot Bitcoin and Ethereum ETFs in countries like the United States, Hong Kong, and the UK. Despite growing interest, Lee argues that adopting similar products in South Korea could potentially destabilize the financial system.

The report highlights several key concerns:

1. Resource allocation inefficiency: If crypto prices rise, significant capital could flow into the crypto market, leading to inefficient resource distribution.

2. Market volatility risks: During price downturns, crypto ETFs could negatively impact financial market liquidity and the health of financial institutions.

3. Lack of understanding: There’s still insufficient comprehension of crypto valuation, coupled with high price volatility.

4. Premature legitimization: Introducing crypto ETFs through traditional financial channels might give investors a false sense of security about these assets.

Lee urges regulators that the crypto sector, in particular the domestic crypto market for South Korea, needs a more comprehensive research into the potential gains and losses associated with spot crypto ETFs. The report suggests that, at present, the drawbacks likely outweigh the advantages.

Lee argues that introducing products based on crypto as underlying assets into the institutional realm at this point, when understanding of crypto value is lacking and price volatility is high, would likely cause market participants to have the impression that crypto operates as verified assets, potentially expanding risks.

“At the point where virtual assets are growing and various products are developed, there is a limit to establishing sufficient regulation and investor protection because the impact of virtual assets on investors and the financial market is uncertain,” Lee said (roughly translated from Korean).

While acknowledging that crypto ETFs could offer investors increased protections and generate profits for financial firms, Lee argues that robust regulatory measures must be in place before considering their introduction. The researcher notes the current challenges in developing comprehensive regulations and investor safeguards due to the shifting nature of the crypto market.

This cautious stance aligns with South Korea’s broader efforts to tighten cryptocurrency regulations. Starting July 19, registered crypto exchanges in the country will be legally required to regularly evaluate the tokens listed on their platforms, with the possibility of delisting certain assets. This move aims to enhance user protection in the rapidly changing crypto landscape.

The global financial sector continues to grapple with the integration of crypto into traditional markets. Under these circumstances, the South Korean think tank’s approach reflects a careful consideration of both potential opportunities and risks associated with these novel financial products.