Korea Institute of Finance warns spot crypto ETFs can harm local economy

The Korean Institute of Finance has flagged the risks posed by sports Bitcoin ETFs to the country’s economy.

While spot crypto exchange-traded funds (ETFs) may offer institutional security for investors and profits for related financial companies, there are many drawbacks that outweigh these benefits, according to a report authored by researcher Bo-mi Lee.

Lee’s report took into account recent approvals from regulatory authorities in the US, Hong Kong and the UK. The researcher concluded that the introduction of these products could lead to financial stability.

Spot crypto ETFs would require issuers to hold and actively trade virtual assets that are highly volatile compared to traditional alternatives, the report said. This can lead to financial instability when prices of underlying crypto assets fall.

Additionally, the researcher warned that significant capital will shift away from traditional cash flow-generating investment sectors in the future. Unlike stocks and bonds, cryptoassets do not generate cash flows.

This will lead to inefficient allocation of resources and diversion of funds from sectors that will contribute to the country’s economic growth.

Lee also argued that there is currently a lack of understanding about the true value of crypto assets and the risks they pose. According to him, the introduction of spot crypto ETFs will lead market participants to perceive that these assets are verified and stable, which is not true.

This will further increase market risks and financial instability.

The report also argued that crypto assets must produce returns that traditional assets cannot replicate to justify their inclusion in regulated financial products. Lee believes that if such assets are to be considered good stores of value, their value as financial assets must be clearer.

Additionally, Lee suggested that spot crypto ETFs would do little to increase investment accessibility, as innovators already have access to these assets through exchanges.

Ultimately, Lee advocated creating appropriate regulatory measures to mitigate risks before the introduction of crypto ETFs. However, the researcher acknowledged the challenges inherent in such an endeavor, given the rapid expansion of virtual assets and the development of various related products.

“[…] The report stated that it is currently difficult to predict the impact of virtual assets on investors and financial markets.

While spot crypto ETFs are not allowed to be traded in South Korea, a new initiative proposed by the country’s left-wing Democratic Party plans to make US spot crypto ETFs available locally.

The warning comes as South Korea tightens its control over the crypto sector. Financial regulators in the country recently required crypto exchanges to evaluate cryptocurrencies listed on exchanges.