[Bitcoin ETF Debate]② Upholding the Principle of Gold-Silver Separation: "Coin Spot ETF Brokerage = Coin Brokerage"

Principle of Separating Finance and Virtual Assets
Bitcoin Is Not an Underlying Asset
Bitcoin Spot ETF Brokerage Is Essentially Bitcoin Brokerage
Concerns Over Speculative Gambling Frenzy in Bitcoin

Editor's NoteSince the U.S. Securities and Exchange Commission (SEC) approved the Bitcoin spot ETF on the 11th (local time), there has been a significant backlash in South Korea. The Financial Services Commission (FSC) has allowed trading of Bitcoin futures ETFs but banned the issuance and brokerage of Bitcoin spot ETFs, fueling controversy. A member of the National Assembly's Political Affairs Committee also joined the debate, stating that "the FSC's legal interpretation is incorrect." The financial authorities maintain the principle of 'Geumga Separation (金假分離),' meaning that recognizing Bitcoin spot ETFs would break the separation principle between financial markets and virtual assets. Conversely, since the SEC's decision acknowledges virtual assets as financial investment products, there is a growing voice that South Korea should also regulate them within the institutional framework. Setting aside the pros and cons of Bitcoin spot ETFs, this article examines the issues surrounding virtual assets through the arguments of both sides.

"The government's position is to prohibit financial companies from owning virtual assets. Allowing Bitcoin spot exchange-traded funds (ETFs) domestically would lead to the issue of owning virtual assets."

On the 16th, Kim So-young, Vice Chairman of the Financial Services Commission, explained the government's stance on banning Bitcoin spot ETFs during a pre-briefing for the presidential work report. Her remarks reveal the true intention behind the ban on Bitcoin spot ETFs. Formally, it may violate the Capital Markets Act, but essentially, it reflects concerns about the principle of 'Geumga Separation (金假分離).'

"Virtual assets are neither currency nor financial investment products"

[Image source=Yonhap News]

The FSC's ban on issuing and brokering Bitcoin spot ETFs is rooted in the 'Emergency Measures on Virtual Assets' announced by the government in 2017. At that time, the government prohibited institutional financial companies from new investments in virtual assets to prevent speculative sentiment, banning holding, purchasing, collateral acquisition, and equity investment in virtual assets. When announcing the measures, the FSC emphasized, "The government's basic position remains unchanged that virtual assets are neither currency nor financial products, and the government does not guarantee the appropriateness of their value."

This is based on the principle of separating finance and virtual assets. According to Article 4 (Paragraph 10) of the Capital Markets Act, underlying assets include △ financial investment products △ domestic and foreign currencies △ general commodities (agricultural products, livestock, fisheries, forestry products, minerals, energy, etc.) △ credit risk △ other risks whose prices, interest rates, indices, or units can be calculated or evaluated. Bitcoin is not an underlying asset under the current Capital Markets Act.

Some have criticized the financial authorities' decision, arguing that Bitcoin can be considered currency. The logic is that in El Salvador, Bitcoin qualifies as legal tender and thus corresponds to foreign currency, allowing securities firms to broker it. However, the legal academia counters this argument.

Currency refers to legal tender under the Bank of Korea Act (Article 48). Foreign currencies naturally mean legal tender as well. Whether specific means of payment like Bitcoin qualify as legal tender should follow the currency laws of the issuing country under international private law. Bitcoin has no issuing country. Therefore, Bitcoin designated as legal tender in countries like El Salvador or the Central African Republic cannot be regarded as currency.

In 2021, a seminar titled "Legal Study on CBDC and the Financial System ? From the Perspective of Currency Law and Central Bank Law," held by the Private Financial Committee, a group of economic and financial experts, discussed similar issues. Professor Jung Soon-seop of Seoul National University School of Law stated, "The same judgment should be made regarding whether it qualifies as foreign currency as a means of external payment under the Foreign Exchange Transactions Act."

In fact, the demand to recognize Bitcoin as currency has been raised by some in the virtual asset industry. If regarded as currency, capital gains from Bitcoin transfers would be considered foreign exchange gains, which are exempt from taxation under tax law.

"Brokerage of Bitcoin spot ETFs = Brokerage of Bitcoin"

The FSC's ban on brokering Bitcoin spot ETFs listed overseas is also in this context. Bitcoin spot ETFs hold actual Bitcoins through custodian banks. Unlike futures ETFs that use Bitcoin futures indices as underlying assets, spot ETFs directly invest in Bitcoin. Therefore, when domestic securities firms broker Bitcoin spot ETFs, it is essentially equivalent to brokering Bitcoin itself.

Furthermore, approving brokerage of Bitcoin spot ETFs could send the wrong signal to the market by recognizing Bitcoin as a financial investment product. A financial industry official said, "If Bitcoin spot ETFs are approved, financial companies will invest in Bitcoin spot, and Bitcoin investment will spread throughout the financial market."

There is also concern about speculative sentiment toward Bitcoin outside the institutional framework. In the 2017 'Emergency Measures on Virtual Assets,' the government expressed serious concern over "the overheating of speculative gambling transactions in virtual assets and the continuous increase in crimes using virtual assets."

This perspective has not changed significantly. Vice Chairman Kim emphasized at the FSC work report pre-briefing, "Virtual assets are highly volatile," adding, "In such circumstances, if financial companies own virtual assets, their volatility could become an issue, so financial companies are prohibited from owning virtual assets."

International organizations share a similar stance with domestic financial authorities, pointing to Bitcoin ETFs as risk factors. The Bank for International Settlements (BIS) cited the potential introduction of Bitcoin ETFs as a financial stability risk in a report last year. Since virtual assets have no intrinsic value and exhibit high price volatility, institutional investors' losses could rapidly expand. The Financial Stability Board (FSB) also stated in its 2022 report that regarding Bitcoin ETFs, "Even if the known exposures of financial companies are small, it does not necessarily mean the risks are low," citing the U.S. subprime mortgage crisis as an example.