The consensus around introducing spot Bitcoin exchange-traded funds (ETFs) in South Korea is growing, but the Financial Services Commission (FSC) remains hesitant. While the FSC has cited a lack of legal grounds, the financial regulator’s internal analysis suggests that spot Bitcoin ETF sales could threaten financial market stability and the broader economy. The cryptocurrency industry has refuted these concerns as “unfounded.”
The FSC recently analyzed the potential positive and negative impacts of allowing the sales of Bitcoin spot ETFs, according to FSC data submitted to Rep. Min Byeong-duk of the Democratic Party of Korea. The analysis identified several negative impacts, including financial market instability, decreased economic productivity, and potential investor harm.
The FSC warns that a drop in Bitcoin prices could trigger a bank run among financial institutions involved in or investing in spot Bitcoin ETFs. The financial regulator added that individual investors might lose confidence in the financial system, leading to widespread panic.
The FSC also highlighted concerns about a potential decline in productivity. With spot Bitcoin ETFs available for sale, investors could channel funds from stocks, corporate bonds, and other traditional investments into Bitcoin, thereby reducing the capital available for companies that contribute to economic growth. Increased Bitcoin transactions could complicate cross-border capital management and challenge the government’s ability to regulate the foreign exchange market.
The analysis points out that officially approving the launch of spot Bitcoin ETFs could mislead investors into believing that virtual assets are safe and government-endorsed, encouraging risky investments. The FSC assessed that Bitcoin’s intrinsic value is difficult to determine, making it riskier than traditional financial assets.
The FSC also acknowledged several positive impacts, such as simplified Bitcoin transaction procedures and increased commission revenue for financial firms like securities companies and asset managers. However, according to the analysis, these benefits are limited to the micro-level, affecting individual investors and some corporations, as opposed to the broader risks at the macro-level.
The financial regulator has cited a lack of legal grounds for not allowing spot Bitcoin ETF trading. Current capital market regulations do not classify cryptocurrencies as “underlying assets” that can serve as the basis for securities products. But in reality, the government’s underlying concern appears to be the potential negative impact on the Korean economy.
“The introduction of a spot Bitcoin ETF needs to be carefully reviewed after establishing a regulatory framework for the virtual asset market and considering global trends,” said an FSC official.
The crypto industry is challenging the FSC’s stance. Industry insiders argue that fears of financial market instability are exaggerated. “Considering the overall size of the domestic capital market, the impact of spot Bitcoin ETFs would be minimal,” said a virtual asset market research firm representative. “The concern of a bank run due to a Bitcoin crash is similar to predicting a market-wide panic if Samsung Electronics shares plummet.”
