A prominent economic think tank in South Korea has expressed doubts about the potential approval of spot Bitcoin (BTC) or Ethereum (ETH) exchange-traded funds (ETFs) by Seoul. The Korea Financial Research Institute, represented by researcher Lee Bo-mi, has voiced concerns over the potential risks associated with the introduction of such financial products.

In a recent report, Lee highlighted that the approval of crypto-related products could threaten South Korea's financial stability. She emphasized that the introduction of these products could lead to a significant increase in crypto prices, which in turn could result in a substantial amount of capital shifting to the virtual asset market.

This capital shift, according to Lee, is likely to cause inefficiencies in resource allocation.

Potential Risks of Bitcoin ETF Approval

The Cryptonews report outlines several potential risks associated with the approval of a Bitcoin ETF. One of the main concerns is the increased volatility in the financial markets.

Lee explained that when crypto prices decline, the liquidity of the financial market and the health of financial institutions could be disrupted. This volatility could undermine the stability of South Korea's financial system.

The researcher also pointed out the general lack of understanding about the value of cryptocurrencies among market participants. She noted that cryptocurrencies are highly volatile, and incorporating products that use them as underlying assets into South Korea's institutional system could create a misleading perception about their proven track record. This misunderstanding could exacerbate the risks associated with these products.

Call for Caution and Further Research

Lee argued that more research is needed to fully understand the benefits and drawbacks of approving crypto-related products. While some politicians have promised to address this issue, regulators have taken a more cautious approach. Proponents of finance and crypto have urged Seoul to follow the footsteps of Washington and Hong Kong in approving spot crypto ETFs, but Lee remains skeptical.

She emphasized that the drawbacks of approving a Bitcoin ETF are likely to outweigh the benefits. To mitigate the risks associated with virtual asset-based ETFs, Lee suggested that regulators need to be well-prepared before granting approval.

However, she acknowledged that there are limitations to the effectiveness of investor protection measures that regulators can introduce.

Current Regulatory Landscape in South Korea

Currently, South Korea allows recognized brokers to handle Bitcoin futures ETFs, but the issuance or intermediation of spot ETFs remains prohibited. This cautious stance reflects regulators' concerns about the potential impact of such products on the financial system.