A South Korean researcher sees risks in spot cryptocurrency ETFs

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A recent report from the Korea Institute of Finance warns against the introduction of spot cryptocurrency exchange-traded funds (ETFs) in South Korea, arguing that the risks outweigh the potential benefits at this time.

Bo-mi Lee, researcher at the institute, analyzed the recent approvals of Bitcoin and Ethereum spot ETFs in countries such as the US, Hong Kong and the UK. Despite the growing interest, Lee argues that the adoption of similar products in South Korea could potentially destabilize the financial system.

The report highlights several key concerns:

1. Inefficiency in Resource Allocation: If cryptocurrency prices increase, significant capital could flow into the cryptocurrency market, leading to inefficient distribution of resources.

2. Risks related to market volatility: During price declines, crypto ETFs could have a negative impact on financial market liquidity and the health of financial institutions.

3. Lack of understanding: There is still insufficient understanding of cryptocurrency valuation, coupled with high price volatility.

4. Premature Legitimation: The introduction of crypto ETFs through traditional financial channels could give investors a false sense of security about these assets.

Lee urges regulators that the cryptocurrency industry, especially the domestic cryptocurrency market for South Korea, needs more comprehensive research into the potential gains and losses associated with spot cryptocurrency ETFs. The report suggests that, at the moment, the disadvantages probably outweigh the advantages.

Lee argues that introducing cryptocurrency-based products as underlying assets into the institutional space at this point, when understanding of the value of cryptocurrencies is lacking and price volatility is high, would likely lead market participants to have the impression that cryptocurrencies operate as verified assets, potentially expanding risks.

“As virtual assets grow and various products are developed, there is a limit to creating sufficient regulation and protection for investors because the impact of virtual assets on investors and the financial market is uncertain,” he said. said Lee (roughly translated from Korean) .

While Lee acknowledges that cryptocurrency ETFs could offer investors greater protections and generate profits for financial firms, he argues that robust regulatory measures need to be in place before considering their introduction. The researcher highlights the current challenges in developing comprehensive regulations and investor protections due to the changing nature of the cryptocurrency market.

This cautious stance is in line with South Korea’s broader efforts to tighten cryptocurrency regulations. Starting July 19, cryptocurrency exchanges registered in the country will be required by law to regularly evaluate tokens listed on their platforms, with the ability to delist certain assets. This move aims to improve user protection in the rapidly evolving crypto landscape.

The global financial sector continues to grapple with the integration of cryptocurrencies into mainstream markets. Under these circumstances, the South Korean think tank’s approach reflects careful consideration of both the potential opportunities and risks associated with these new financial products.

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