[Exclusive] Korea's First 'Virtual Asset Spot ETF' Listing Planned... Obstacles and Implications

Listing of Virtual Asset Spot ETF Requires Regulatory Special Permission from Financial Authorities
Concerns of Capital Outflow When Large-Scale Virtual Asset Spot Procurement Occurs Domestically
Impact of Volatile Virtual Asset Shocks on the Real Economy Must Also Be Considered

A domestic financial platform company’s proposal to list a cryptocurrency spot exchange-traded fund (ETF) in Busan as a key project within the blockchain regulatory sandbox has drawn market attention to whether it will actually be introduced. With major overseas countries consecutively listing cryptocurrency spot ETFs, investor interest in domestic adoption is rising. However, there are regulatory issues to resolve first, and public opposition to introducing cryptocurrencies into the capital market is also significant.

Challenges to Overcome…Financial Authorities’ Approval

Spot ETFs allow cryptocurrencies to be traded on stock exchanges, improving investor accessibility and offering advantages in terms of security and transaction management. However, the Financial Services Commission (FSC) judged earlier this year that issuing and brokering Bitcoin spot ETFs contradicts the existing policy prohibiting financial companies from holding, purchasing, acquiring as collateral, or investing equity in cryptocurrencies. Bitcoin was considered to potentially violate the Capital Markets Act requirements. Article 4, Clause 10 of the Capital Markets Act defines underlying assets but excludes cryptocurrencies such as Bitcoin, Ethereum, Solana, and Ripple. Accordingly, domestic asset management companies cannot issue, list, or broker spot ETF products based on cryptocurrencies as underlying assets.

PVR Group, leading the effort to list cryptocurrency spot ETFs, plans to seek a limited and temporary relaxation of this regulation. Through a proposal for the Busan blockchain regulatory sandbox project, they intend to request the FSC to grant a regulatory sandbox exemption allowing Bitcoin, Ethereum, Solana, and Ripple to be included as underlying assets of securities and defined as securities and financial investment products, enabling ETF issuance, listing, and trading. Previously, U.S. financial authorities also rejected spot ETF approval for similar reasons but eventually allowed listing following lawsuits and court orders. The rationale was that cryptocurrencies are already traded, and allowing futures ETFs but not spot ETFs was inconsistent.

Consideration Needed on Impact on Real Economy Including Capital Outflow

Despite the global trend of expanding cryptocurrency investment and growing expectations among domestic cryptocurrency investors, financial authorities and experts express deep concerns about introducing cryptocurrency spot ETFs domestically. One concern is capital outflow when large-scale cryptocurrency spot assets are procured overseas triggered by ETF issuance. Another reason the financial authorities hesitate to allow spot ETFs is the potential for the volatile cryptocurrency market shocks to have a greater impact on the real economy.

Jang Boseong, a research fellow at the Korea Capital Market Institute, said, "The launch of cryptocurrency spot ETFs not only amplifies the inherent risks of the underlying assets but may also cause additional risks," adding, "Problems inherent in cryptocurrencies such as inefficient resource allocation, price risk, deposit volatility, and vulnerability to external factors could worsen with the market’s expansion." He continued, "Distorted perceptions, increased financial instability pathways, capital outflows, and policy dilemmas must also be considered," and noted, "While expectations for cryptocurrency innovation are high, there remains the challenge of proving actual usefulness."

Lee Bomi, a research fellow at the Korea Institute of Finance, pointed out, "It could cause side effects such as increased inefficiency in resource allocation, expanded exposure to cryptocurrency-related risks in financial markets, and harm to financial stability," adding, "When prices fall after introducing cryptocurrency-linked products, liquidity in financial markets and the soundness of financial institutions could deteriorate, undermining trust in financial markets and regulators and threatening financial stability."

In response to these concerns, PVR Group advocates testing trading side effects first through a pilot project. They aim for a phased approach starting with a demonstration project followed by legislation. They plan to monitor the demonstration project of cryptocurrency spot ETF trading to address any side effects or issues once trading becomes active. The approach is positive in terms of improving investment accessibility and diversification, securing reliability through regulation, revitalizing the market, ease of security and management, and investor protection.

Domestic Asset Management Industry’s Growing Expectations for Cryptocurrency Spot ETF Approval

The domestic asset management industry is hopeful for the approval of cryptocurrency spot ETF trading. They believe that spot ETFs can lead to infrastructure advancement, improved market accessibility, and the creation of new investment opportunities. Some argue there is little justification to restrict trading via ETFs given the already active cryptocurrency investment in Korea. The number of domestic cryptocurrency investors is approximately 14 million. Upbit cryptocurrency exchange has about 10 million members. Total users number 4.42 million, with 2.53 million daily active users. The maximum daily trading volume is about 14 trillion KRW, and the average daily trading volume in 2023 is around 5 trillion KRW.

Measures to minimize side effects through limited and phased introduction, as seen in the UK, could also be considered. The UK Financial Conduct Authority (FCA) approved Bitcoin spot ETFs for institutional investors, judging that sufficient data had been accumulated from long-term cryptocurrency trading. At the end of May, Bitcoin and Ethereum spot ETFs for institutional investors were listed on the London Stock Exchange.

An asset management industry official said, "We hope the introduction of spot ETFs will be reviewed after evaluating the positive effects and side effects observed in major countries that have adopted Bitcoin spot ETFs," adding, "The asset management industry will also strive to protect investors when spot ETFs are introduced."

Increasing Number of Overseas Countries Approving Cryptocurrency Spot ETFs

Meanwhile, the number of countries approving Bitcoin spot ETF trading is increasing. Starting with Canada in 2021, the U.S. Securities and Exchange Commission (SEC) approved it in January this year. The UK, Hong Kong, Germany, and Brazil have also allowed Bitcoin spot ETFs. Not only Bitcoin spot ETFs but also spot ETFs based on Ethereum as an underlying asset are expected to be approved soon. In May, the SEC approved amendments to exchange listing rules for Ethereum spot ETF trading.

The cryptocurrency spot ETF market is growing rapidly. In the first quarter of this year, professional investors invested about 15 trillion KRW and individual investors about 65 trillion KRW in the U.S. Bitcoin spot ETF market. Approximately 80 trillion KRW of funds flowed in net. The pace of net fund inflow is expected to accelerate further with the approval of Ethereum spot ETFs. Global banks such as Standard Chartered predict that cryptocurrencies Solana and Ripple will also be allowed for ETF listing and trading.