According to a recent analysis by the Korea Institute of Finance (KIF), the introduction of a Bitcoin (BTC) spot exchange-traded fund (ETF) in Korea could cause significant economic disruption .
This report highlights the potential unique challenges the Korean market could face despite the global trend of approving cryptocurrency-linked ETF products.
Potential pitfalls of the Korean Bitcoin ETF
Recently, as Bitcoin spot ETFs have been approved and introduced in various global markets, discussions on this are actively taking place in the Korean financial community. Lee Bo-mi, a researcher at the Korea Institute of Finance, expressed concerns about the potential side effects of the product in a report titled “Review of Approval of Overseas Virtual Asset Spot ETF.”
“If the issuance and trading of virtual asset-linked products is permitted, investors will receive institutional protection. “While financial companies have the advantage of being able to generate profits, there are also side effects,” he explained .
Read more: What is a Bitcoin ETF ?
Lee outlined some potential side effects associated with the introduction of a Bitcoin ETF. These include increased inefficiencies in resource allocation, increased exposure to risks associated with virtual assets, and weakened overall financial stability. Lee emphasized that while institutional investors may benefit from these financial instruments, the broader economic impact could be detrimental.
For example, the US Securities and Exchange Commission's (SEC) approval of a Bitcoin ETF earlier this year significantly increased price volatility. Although the value of Bitcoin has risen 40% in five months, the inherent volatility and speculative nature of virtual assets pose significant risks. Analysts warned that similar volatility in Korea could destabilize financial markets.
Global trends and regional differences
Other financial regulators around the world have also approved similar cryptocurrency-linked products. In April 2024, the Hong Kong Securities and Futures Commission (SFC) approved Bitcoin and Ethereum spot ETFs . The UK's Financial Conduct Authority (FCA) followed suit in May 2024.
However, each region has a different approach to these financial products, reflecting its regulatory environment and market conditions. For example, Hong Kong's spot Bitcoin ETF introduced cash redemption. This method differs from the cumbersome in-kind repayment method used in the United States.
On the other hand, the UK's approach limits ETF investment to institutional investors only. These regional differences highlight the complexity and potential risks of integrating these products into existing financial systems.
Representative Lee warned that introducing a Bitcoin ETF in Korea could mislead market participants into perceiving the virtual asset as a fully verified and stable investment option. This misunderstanding can result in a large influx of institutional funds into highly volatile virtual assets.
As a result, this may result in an unstable financial situation. Additionally, financial instability may force financial institutions to liquidate existing assets to secure liquidity, which may further worsen market volatility.
In the report, the researcher emphasized the need for strong regulatory measures to mitigate risks associated with cryptocurrency-based ETFs. They argued that without sufficient supervision and investor protection , the Korean market could be seriously affected.
Read more: How to Trade Bitcoin ETF: A Step-by-Step Approach
The rapid growth of the virtual asset market and the proliferation of related financial products require a careful and systematic regulatory approach. Governor Lee called for comprehensive regulatory measures to protect financial markets and protect investors. He said the impact of virtual assets on the financial system is still uncertain and emphasized the urgent need for regulations that can adapt to changing market dynamics.
