[Bitcoin ETF Debate] ① "Not Direct Investment" Virtual Assets Expanding Institutional Footprint

Domestic Calls for ETF Sales Grow
Financial Authorities Oppose 'Capital Markets Act Violation'
Trend Toward Virtual Asset Regulation Unstoppable

Editor's NoteSince the approval of the Bitcoin spot ETF by the U.S. Securities and Exchange Commission (SEC) on the 11th (local time), there has been significant aftershock 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 'separation of finance and virtual assets' (金假分離), arguing that recognizing Bitcoin spot ETFs would break the separation 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 manage them within the regulatory 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.

'$4.6 billion (6 trillion KRW)'.

A Bitcoin spot-based exchange-traded fund (ETF), representing virtual assets, made a spectacular debut on the U.S. stock market by recording a trading volume of 6 trillion KRW on its first day of listing. In South Korea, voices have grown louder, mainly from individual and institutional investors, calling for the opening of investment channels for Bitcoin spot ETFs. However, the financial authorities maintain a firm stance that "the issuance and brokerage of Bitcoin spot ETFs are illegal." The market expects that, given the global trend toward virtual asset institutionalization, the authorities will ultimately lose this battle in the long run.

Should Bitcoin be included as an ETF investment target?

On the 11th, the Financial Services Commission (FSC) officially announced its position on the issuance and brokerage of Bitcoin spot ETFs for the first time. The FSC stated, "Issuing Bitcoin spot ETFs or brokering overseas Bitcoin spot ETFs may violate existing government positions and the Capital Markets Act." This decision came immediately after the U.S. Securities and Exchange Commission (SEC) approved spot ETFs on the 10th (local time). It is unusual for the financial authorities to proactively crack down on securities firms brokering overseas ETF products. However, the authorities clarified that Bitcoin futures ETFs can continue to be traded as before and that there are currently no plans to regulate them. In South Korea, many major securities firms such as Mirae Asset, Samsung, Hana, KB, and NH Investment & Securities are brokering Bitcoin futures ETFs.

The core of the current debate over Bitcoin spot ETFs lies in the legal interpretation of whether they violate the Capital Markets Act. The FSC denied approval of Bitcoin spot ETFs, stating that virtual assets are not included as investment targets for collective investment schemes like ETFs under Article 4, Paragraph 10 of the Capital Markets Act. The law defines 'underlying assets' as △ financial investment products △ currencies (including foreign currencies) △ general commodities △ credit risks △ risks whose price indices or units can be calculated or evaluated by reasonable methods. Bitcoin futures ETFs are products that track futures indices with derivative characteristics, differing from Bitcoin spot ETFs that actually purchase and hold Bitcoin. The FSC, which does not recognize Bitcoin as an underlying asset, has thus allowed Bitcoin futures ETFs to continue. Kim Seong-hoon, head of the ETF division at Hanwha Asset Management, said, "Collective investment schemes aim to operate by following changes in the price or index of underlying assets," adding, "Bitcoin cannot be included as an underlying asset."

The perspective of the National Assembly's standing committee, the Political Affairs Committee, differs. Lee Yong-woo, a member of the Democratic Party who has served as co-CEO of KakaoBank and head of asset management at Korea Investment & Securities, said, "The criterion for stock-like characteristics is the relationship of responsibility and rights and obligations." He explained, "Bitcoin originally had no stock-like characteristics as it was issued by a foundation, but it gained stock-like characteristics when created in the form of an ETF issued by a company." He added, "The entities responsible in Bitcoin spot ETFs are the asset managers and securities firms," emphasizing, "The risk of the product should be judged by the market participants." His office also argued that since El Salvador designated Bitcoin as legal tender in September 2021, it should be considered a foreign currency.

Similar opinions have been raised in the legal community. A capital markets specialist lawyer, who requested anonymity, said, "Under current law, risks whose prices can be calculated or evaluated can be underlying assets, and considering Bitcoin's trading volume, it can meet these requirements." He added, "From the perspective of investor convenience and international consistency, Bitcoin spot ETFs must be allowed."

Flow triggered in the U.S. cannot be stopped domestically either

The market predominantly believes that the financial authorities will eventually approve brokerage of Bitcoin spot ETFs. The approval of Bitcoin spot ETF trading in the U.S., a financial hub, was partly because the SEC failed to clearly justify to the courts why it allowed only futures ETFs and not spot ETFs. SEC Chair Gary Gensler maintained a negative view, stating, "We only approved ETPs (a broader concept including ETFs), not Bitcoin itself," and reiterated that Bitcoin is a speculative asset. From 2018 to March 2023, the SEC rejected over 20 spot ETP approval applications, including Grayscale Investments' application, but this was insufficient to stop the overall trend. Grayscale has been pushing for ETF listing by identifying Bitcoin investment demand from retirement pensions and institutions.

Our government is not indifferent to virtual assets themselves. The Bank of Korea, FSC, and Financial Supervisory Service have been conducting digital currency experiments to seize leadership in future currencies. Government agencies plan to conduct usability tests of 'Central Bank Digital Currency (CBDC),' similar to coins, by the end of this year. Additional experiments involving public participation are also planned. Although CBDC uses blockchain technology to store data electronically, similar in principle to Bitcoin-type assets, it is distinguished by being issued and guaranteed directly by the central bank. The Bank of Korea has drawn a line by stating, "CBDC is excluded from the scope of virtual assets under Article 2 of the Act on the Protection of Users of Virtual Assets."

Since the 'Act on the Protection of Users of Virtual Assets,' which regulates the entire virtual asset market, is scheduled to be enforced in July this year, there is a high possibility of regulatory easing in line with this. The FSC stated, "With the enforcement of the Virtual Asset Act in July and overseas cases such as the U.S., we will continue to review the matter." Cho Soo-min, a researcher at Korea Investment & Securities, said, "The launch of spot ETFs in the U.S. will accelerate the establishment of an institutional framework for the issuance, distribution, and industry promotion of virtual assets under the Virtual Asset Act," adding, "Although immediate investment in spot ETFs is impossible, continuous monitoring is required."