Korea Institute of Finance warns spot crypto ETFs can harm local economy

The Korea Institute of Finance has flagged the risks sport Bitcoin ETFs pose to the nation’s economy.

According to a report penned by researcher Bo-mi Lee, while spot crypto exchange-traded funds (ETFs) can offer institutional security for investors and profits for related financial companies, there are a lot of drawbacks that outweigh these benefits.

Lee’s report took into consideration the recent approvals by regulatory authorities in the US, Hong Kong, and the UK. The researcher concluded that the introduction of these products can lead to financial stability.

The report noted that spot crypto ETFs would require issuers to hold and actively trade virtual assets, which are highly volatile compared to traditional alternatives. This could lead to financial instability when the prices of underlying crypto-assets drop.

Further,  the researcher warned that substantial capital would move from traditional investment sectors that generate future cash flows. Unlike equities and bonds, crypto-assets do not generate cash flows.

As such, this would lead to inefficient allocation of resources and divert funds away from sectors that would otherwise contribute to the nation’s economic growth.

Lee further argued that currently, there is a lack of understanding regarding the true value of crypto assets and the risks they pose. According to him, introducing spot crypto ETFs would lead market participants to perceive that these assets are verified and stable, which is not accurate. 

This would further exacerbate market risks and financial instability.

The report also asserted that crypto assets must produce payoffs that traditional assets cannot replicate to justify their inclusion in regulated financial products. Lee believes that their value as financial assets needs to be clearer if such assets are to be considered good value-storing means.

In addition, Lee asserted that spot crypto ETFs won’t contribute much to improving investment accessibility since inventors can already access these assets via exchanges.

Ultimately, Lee advocated for the creation of proper regulatory measures to mitigate the risks involved with crypto ETFs before their introduction. However, the researcher acknowledged the challenges involved with such an endeavor, considering the rapid expansion of virtual assets and the development of various related products.

“[…] It is currently difficult to foresee the impact of virtual assets on investors and financial markets,” the report noted.

While spot crypto ETFs aren’t allowed to be traded in South Korea, a recent initiative proposed by the nation’s left-wing Democratic Party plans to make US spot crypto ETFs locally available.

The warning comes as South Korea has been tightening its oversight of the crypto sector. Financial regulators in the nation have recently mandated that crypto exchanges evaluate the cryptocurrencies listed on exchanges.