The Korea Institute of Finance has highlighted the risks associated with spot Bitcoin ETFs and their potential impact on the nation’s economy.

According to a report by researcher Bo-mi Lee, while spot crypto exchange-traded funds (ETFs) can offer institutional security for investors and generate profits for financial companies, several drawbacks may outweigh these benefits.

Lee’s report considered recent approvals by regulatory authorities in the US, Hong Kong, and the UK. The researcher concluded that the introduction of these products could affect 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. This could lead to inefficient allocation of resources and divert funds away from sectors that contribute to the nation’s economic growth.

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

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

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