South Korean think tank says spot crypto ETFs do more harm than good for local economy

South Korea’s financial research institution said in its latest report that the introduction of spot crypto exchange-traded funds will likely result in more troubles than benefits for the country’s economy.

“Allowing [such] products can lead to side effects such as increased inefficiency in resource allocation, increased exposure to crypto-related risks in the financial market, and weakened financial stability,” Korea Institute of Finance said in a Sunday report . 

The local think tank explained that crypto ETFs may lead the crypto market to intercept a large amount of cash flows for the local financial market, which could mean a lesser amount of investment for local industries. KIF added that this could make the local financial market more vulnerable to crises in the crypto sector, potentially leading to increased investor distrust in the market and regulators.

“At this point, we believe that the introduction will do more harm than good,” the report said. Nonetheless, the think tank acknowledged that crypto ETFs would 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, South Korea’s ruling, left-wing 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. The 11 spot bitcoin funds in the U.S. 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.