A recent report from the Korea Institute of Finance (KIF) has sounded the alarm on the potential risks of introducing spot crypto exchange-traded funds (ETFs) in South Korea, warning that it could lead to more problems than benefits for the country’s economy. The report highlights the potential side effects of allowing such products, including inefficient resource allocation, increased risks related to cryptocurrency in financial markets and weakened financial stability.

The KIF expressed concerns that crypto ETFs may lead to a large amount of cash flow from the local financial market being intercepted by the cryptocurrency market, resulting in reduced investment in local industries. This could make the local financial market more vulnerable to crises in the cryptocurrency sector, potentially leading to increased investor distrust in the market and regulators.

The report also emphasized that the introduction of spot crypto ETFs would do more harm than good, especially given the current state of the cryptocurrency market. However, the think tank acknowledged that crypto ETFs could become a good store of value if the underlying cryptocurrencies grow to become more defined and unique financial assets.

South Korean regulators currently do not allow the issuance or trading of spot crypto ETFs, on the basis that bitcoin and other cryptocurrencies cannot serve as underlying assets for such investment vehicles. However, the ruling Democratic Party has recently set forth an initiative to make spot crypto ETFs locally available, as part of its campaign pledge in the last general election.

The U.S. introduced its first spot crypto ETFs in January, and the 11 spot bitcoin funds have since amassed $55.55 billion in total net assets, exceeding pre-launch expectations. Hong Kong has also introduced spot ETFs for bitcoin and ether in April, while Australia’s largest stock exchange ASX listed its first spot bitcoin ETF last week.

In related news, the Office of the President of the Republic of Korea is urging the Financial Services Commission (FSC) to reconsider its stance on spot Bitcoin ETFs. The FSC had previously warned against trading United States-based spot Bitcoin exchange-traded funds (ETFs), citing potential violations of the Capital Markets Act.

The FSC is the principal financial regulator in South Korea, and it issued a brief press release on January 12 that suggested domestic securities firms trading or brokering overseas-listed spot Bitcoin ETFs “may violate” the Capital Markets Act, which seeks financial innovation and fair competition in South Korea’s capital markets. However, the statement also noted that the regulatory regime for crypto in the country is still in its established stages and would review the regulations as things develop overseas.

Another South Korean financial regulator, the Financial Intelligence Unit (FIU), is reportedly planning to introduce new regulations around digital asset mixing services. According to a local report on January 15, an FIU official revealed that the discussions started in Korea when the U.S. introduced sanctions against crypto mixers. However, the final decision on such an enforcement is not expected anytime soon.