According to a recent analysis by the Korea Institute of Finance (KIF), the introduction of spot Bitcoin (BTC) exchange-traded funds (ETFs) in South Korea could lead to significant economic disruptions.

The report highlights potential unique challenges that the South Korean market might face despite the global trend of approving crypto-linked ETF products.

Potential Pitfalls of Bitcoin ETFs in South Korea

The recent approval and introduction of spot Bitcoin ETFs in various global markets have sparked significant discussions in the South Korean financial community. Lee Bo-mi, a researcher at KIF, expressed concerns over the potential adverse effects of these products in a report titled “Review on Approval of Overseas Virtual Asset Spot ETFs.”

“If the issuance and trading of virtual asset-linked products is allowed, investors can receive institutional protection. While financial companies have the advantage of making profits, there are also side effects,” she explained.

Read more: What Is a Bitcoin ETF?

Lee outlined several potential side effects associated with the introduction of Bitcoin ETFs. These include increased inefficiency in resource allocation, greater exposure to risks tied to virtual assets, and overall undermining of financial stability. Lee emphasized that while institutional investors might benefit from these financial products, the broader economic implications could be detrimental.

For instance, earlier this year, the US Securities and Exchange Commission’s (SEC) approval for spotting Bitcoin ETFs led to significant price volatility. Despite a 40% increase in Bitcoin’s value over five months, virtual assets’ inherent volatility and speculative nature pose considerable risks. The analyst warned that similar volatility in South Korea could destabilize the financial market.

Global Trends and Regional Differences

Other financial regulators globally have also approved similar crypto-linked products. In April 2024, the Hong Kong Securities and Futures Commission (SFC) approved spot Bitcoin and Ethereum ETFs. Subsequently, the UK’s Financial Conduct Authority (FCA) followed suit in May 2024.

However, each region has tailored its approach to these financial products, reflecting differing regulatory environments and market conditions. For example, Hong Kong’s spot Bitcoin ETFs introduced a cash redemption method. This approach differs from the more cumbersome spot redemption method used in the US.

On the other hand, the UK’s approach restricts investments in these ETFs to institutional investors only. These regional variations underscore the complexity and potential risks of integrating such products into traditional financial systems.

Lee cautioned that introducing Bitcoin ETFs in South Korea might mislead market participants into perceiving virtual assets as fully vetted and stable investment options. This misconception could lead to a significant influx of institutional funds into highly volatile virtual assets.

Consequently, this could create a precarious financial situation. Moreover, the resulting financial instability could compel financial institutions to liquidate traditional assets to secure liquidity, further exacerbating market volatility.

In her report, Lee stressed the importance of strong regulatory measures to mitigate the risks associated with virtual asset-based ETFs. She argued that the South Korean market could face severe repercussions without sufficient oversight and investor protection mechanisms.

Read more: How To Trade a Bitcoin ETF: A Step-by-Step Approach

The rapid growth of the virtual asset market and the proliferation of related financial products necessitate a cautious and well-regulated approach. Lee called for comprehensive regulatory measures to safeguard the financial market and protect investors. She noted that the impact of virtual assets on the financial system remains uncertain, highlighting the urgent need for regulations that can adapt to the changing market dynamics.