The Korea Institute of Finance argued in its latest report that crypto ETFs will end up injecting more troubles than benefits from the economic perspective.

According to the translated version of the report, South Korea’s financial research institution asserted,

“Allowing [these] 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.”

Supporting the argument of how ETFs will do more harm than good, the report explained that these products would help direct funds into the crypto market. This, in turn, would obstruct a significant chunk of funds from entering into the local financial market.

In retrospect, this would translate to a drop in the amount of investment for native industries, leading to inefficiencies in capital allocation.

South Korean regulators believe that Bitcoin and other crypto assets are ineligible to serve as underlying assets for ETFs. As a result, unlike other countries like Hong Kong and Australia, the Korean government has not greenlit the issuance and listing of spot crypto ETFs.

The latest report also pointed out that ETFs would end up making the local financial market more susceptible to crypto sector crises. That could, in hindsight, erode away investor trust associated with the market and regulators.

The macro picture

Koreans have always been quite active participants in the crypto market. In fact, traders from this region have a strong say in molding the market bias during the Eastern/APAC trading hours.

Several times this year the won has surpassed the US dollar to become the most traded crypto-fiat pair, serving as a testament to Koreans’ crypto interest.

Alongside, consider the state of the Kimchi Premium Index. This index started off on a strong note this year and peaked around 10.88 in mid-March when Bitcoin’s price attained its ATH.  

For context, this index gauges the price gap between South Korean exchanges and other exchanges around the world.

A number above zero points towards the presence of buying bias. This typically means Korean market participants are shelling out more than usual funds to acquire Bitcoin.

Conversely, when bears are in the driving seat, Bitcoin trades at a discount on the index.

The reading of the index has slipped down to 1.4 already, but as illustrated below, it continues to hover in the positive territory, indicating that Koreans are still active in the market and are adding BTC to their stash by paying a premium.  

The number of active crypto users in the country has also risen lately. The Korea Financial Intelligence Unit's latest semi-annual report pointed that the number bumped by 390k to 6.45 million as of the end of last year.

The daily average crypto trading volume also grew 24% to $2.6 billion, while the total value of the crypto held by registered exchanges notched up 53% to $32 billion.