News
The Korea Institute of Finance warns that spot cryptocurrency ETFs can harm the local economy
The Korea Institute of Finance has flagged the risks that Bitcoin ETFs pose to the nation’s economy.
According to a relationship written by researcher Bo-mi Lee, While cryptocurrency Exchange Traded Funds (ETFs) can offer institutional safety to investors and profits for related financial companies, there are many drawbacks that outweigh these benefits.
Lee’s report took into account the recent approvals by regulatory authorities in the United States, Hong KongAND The UK. The researcher concluded that the introduction of these products can lead to financial stability.
The report notes that spot cryptocurrency ETFs would require issuers to actively hold and trade virtual assets, which are highly volatile compared to traditional alternatives. This could lead to financial instability as the prices of underlying crypto-assets fall.
Furthermore, the researcher warned that large amounts of capital would move away from traditional investment sectors that generate future cash flows. Unlike stocks and bonds, crypto-assets do not generate cash flows.
As such, this would lead to inefficient allocation of resources and divert funds from sectors that would otherwise contribute to the nation’s economic growth.
Lee further argued that there is currently a lack of understanding regarding the true value of cryptocurrencies and the risks they pose. According to him, the introduction of spot cryptocurrency 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 states that crypto assets must produce profits 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 a good means of storing value.
Furthermore, Lee said that spot cryptocurrency ETFs will not do much to improve investment accessibility as inventors can already access these assets via exchanges.
Ultimately, Lee advocated for the creation of adequate regulatory measures to mitigate the risks associated with crypto ETFs before their introduction. However, the researcher recognized the challenges associated with such an undertaking, considering the rapid expansion of virtual resources and the development of various related products.
“[…] It is currently difficult to predict the impact of virtual assets on investors and financial markets,” the report notes.
While spot cryptocurrency ETFs cannot be traded in South Korea, a recent initiative proposed by the nation’s left-wing Democratic Party, plans to make U.S. cryptocurrency spot ETFs available locally.
The warning comes as South Korea has tightened oversight of the cryptocurrency sector. The nation’s financial regulators did recently commissioned that cryptocurrency exchanges evaluate cryptocurrencies listed on the exchanges.