South Korean Financial Expert Warns Against Cryptocurrency Spot ETF: Not Good! Will Impact Local Financial System

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Financial Stability Faces Risks

The Korea Institute of Finance (KIF) has issued a serious warning regarding the potential risks of introducing Exchange-Traded Funds (ETFs) for spot cryptocurrency exchanges domestically. According to their latest report, the potential drawbacks of such financial products may outweigh the benefits to the South Korean economy.

Low Resource Allocation Efficiency Leading to Financial Instability

In a report released on Sunday, the KIF emphasized several issues associated with approving spot cryptocurrency ETFs. The think tank highlighted that these products might result in low resource allocation efficiency. Furthermore, the risk exposure to fluctuations in the cryptocurrency market significantly increases, potentially undermining the stability of the overall financial system.

Shift of Funds to Speculation Could Reduce Domestic Industrial Investment

One of the key points raised by the KIF is that capital may shift from local industries to the cryptocurrency market.

Cryptocurrency ETFs could attract a substantial outflow of cash from traditional financial markets, leading to a reduction in investment in domestic industries. This shift could make the local financial system more vulnerable to the volatility of cryptocurrencies, further eroding investor confidence in the market and regulatory framework.

South Korea's Regulatory Stance: No Issuance or Trading of Cryptocurrency ETFs

Currently, South Korean regulatory authorities do not allow the issuance or trading of spot cryptocurrency ETFs. The primary reason for opposing such products is that cryptocurrencies like Bitcoin do not meet the asset standards to serve as investment instruments.

Across Asia, Japan and Taiwan prohibit the issuance or trading of cryptocurrency ETFs for their citizens. Singapore allows trading of cryptocurrency ETFs but limits it to professional investors. Hong Kong permits issuance and trading, which had attracted international attention at one point, but due to restrictions on mainland Chinese residents' participation, the trading volume is not as optimistic as initially anticipated.

Strict FSC? The Japanese Financial Services Agency also does not allow citizens to trade Bitcoin ETFs and prohibits margin trading.

Taiwan prohibits purchasing virtual currency-related securities through margin trading, and Bitcoin spot futures ETFs are all regulated.

The ETF in Hong Kong has accumulated 300 million Hong Kong dollars, and the community still hopes for the opening of purchasing and trading for mainland China, which is 268 times different from the United States.

Global Trend of Cryptocurrency ETFs

Despite South Korea's cautious approach, other countries are advancing the launch of spot cryptocurrency ETFs. In January, the United States introduced the first batch of spot cryptocurrency ETFs, with a total of 11 Bitcoin spot funds holding net assets exceeding $52 billion, surpassing initial expectations. Similarly, Hong Kong launched Bitcoin and Ethereum spot ETFs in April, and the Australian Securities Exchange (ASX) listed the first Bitcoin spot ETF last week.

Net inflow of one Bitcoin? Australian Bitcoin spot ETF "IBTC" had a dismal debut on the first day of trading.

Could Korean Political Factors Help Change the Situation?

The ruling party in South Korea, the Democratic Party, recently proposed the introduction of spot cryptocurrency ETFs in the local market, which was also one of their campaign promises in the last election. Despite warnings from the financial industry, there is an expectation that political power might have the chance to change the current situation.

ETFs Not So Bad

While the KIF is skeptical about the direct benefits of introducing spot cryptocurrency ETFs, the report also acknowledges that with the maturation and clearer understanding of underlying cryptocurrencies, these products could become valuable financial assets. However, the think tank currently believes that the risks far outweigh the potential returns.