Spot crypto ETFs could have detrimental effects on the local economy cautions the Korea Institute of Finance

The Korea Institute of Finance has raised concerns about the potential risks posed by Bitcoin ETFs on the country’s economy. In a report authored by researcher Bo-mi Lee, it was highlighted that while spot crypto ETFs can provide institutional security for investors and generate profits for financial firms, the disadvantages outweigh the benefits. The report took into account recent approvals from regulatory authorities in the US, Hong Kong, and the UK, and concluded that the introduction of these products could lead to financial instability. One of the main concerns is that spot crypto ETFs would require issuers to hold and actively trade virtual assets, which are highly volatile compared to traditional alternatives. This volatility could result in financial instability if the prices of the underlying crypto-assets drop. Furthermore, the report warned that a significant amount of capital would flow away from traditional investment sectors that generate future cash flows. Unlike equities and bonds, crypto-assets do not generate cash flows, which could lead to an inefficient allocation of resources and divert funds away from sectors that contribute to economic growth. Lee also argued that there is a lack of understanding regarding the true value and risks of crypto assets. Introducing spot crypto ETFs could create a perception among market participants that these assets are verified and stable, which is not accurate. This would increase market risks and financial instability. The report emphasized that crypto assets must offer payoffs that traditional assets cannot replicate in order to justify their inclusion in regulated financial products. Lee believes that the value of these assets as financial instruments needs to be clearer if they are to be considered as good value-storing means. Additionally, Lee stated that spot crypto ETFs would not significantly improve investment accessibility since investors can already access these assets through exchanges. Ultimately, the report called for the establishment of proper regulatory measures to address the risks associated with crypto ETFs before their introduction. However, Lee acknowledged the challenges involved in implementing such measures, given the rapid expansion of virtual assets and the development of related products. While spot crypto ETFs are not currently allowed to be traded in South Korea, a recent proposal by the left-wing Democratic Party aims to make US spot crypto ETFs available locally. These warnings come as South Korea has been tightening its oversight of the crypto sector, with financial regulators mandating that crypto exchanges evaluate the cryptocurrencies listed on their platforms.