ANALYSIS Bitcoin ETF controversy to continue
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The financial authorities’ ban on the local trading and brokerages of spot bitcoin exchange-traded funds (ETFs) will take an extended political turn, influenced largely by voter sentiment in the lead-up to the April 10 general election, according to market watchers.
Most at issue is whether the National Assembly will be able to revise the Capital Markets Act to render moot the Financial Services Commission's (FSC) Jan. 11 judgment that the digital coins do not fall within the definition of “underlying assets.” The decision was grounds for local brokerages to suddenly halt overseas spot bitcoin ETF trading services that began in 2021, including in Canada, Australia and Germany. Some even went a step further to halt futures bitcoin ETF services, only to resume after the FSC said the ban would be limited to spot trading.
Experts say the definition could be expanded to recognize the virtual coins as valid underlying assets, because their value can be appraised accurately through a proper, rational method.
However,in greater play are investor protection considerations, a key voting issue for Koreans who almost always look to the government for remedy after incurring heavy losses. Bitcoin, extremely volatile by nature, will end up fueling controversy over regulatory and institutional failures to prevent or at least mitigate the price volatility. This is an unwanted yet clearly foreseeable course of matters for the FSC, certain to become a liability for the incumbent administration in election times.
The FSC announced the ban hours after the U.S. Securities and Exchange Commission (SEC) approved spot bitcoin ETFs, Jan. 10 (local time). Many local investors expected Korea would follow suit, allowing them to join the global craze in the 132 trillion won ($100 billion) spot bitcoin trading this year.
Legal interpretation
Legal experts say bitcoin qualifies as an underlying asset under a subclause of the act.
Bitcoin does not fall under the categories of financial investment instruments, currencies, general goods or credit risks.
However, it can, according to Jin Hyun-soo, an attorney at law firm Decent, in the context of “a risk relating to economic phenomena that can be appraised in a reasonable and appropriate way in the form of prices, interest rates, market indexes and/or any unit of measurable financial instruments.”
“Bitcoin prices are set by supply and demand in the market, so the case can be made that it has an intrinsic value,” Jin said. “If it comes down to a matter of interpretation, the case for the definition will merit the approval of spot ETFs.”
Presidential chief of staff for policy Sung Tae-yoon speaks during a press conference, Jan. 18. Yonhap
Wait and see
However, the point of contention will move beyond the legal realm and take a political turn, as indicated by a shift in the presidential office's cryptocurrency policy directives.
“We have advised the FSC against a decisive stance about spot bitcoin ETFs,” presidential chief of staff for policy Sung Tae-yoon said during a Jan. 18 briefing.
The presidential office, according to the official, was “reviewing whether the country’s legal system should undergo changes in the context of financial market developments overseas as well as the scope and degree of side effects anticipated thereafter.”
The new “wait-and-see” approach came about a week after, when the FSC issued a statement to make sure the ban remains in place.
The FSC announced a spot trading ban on Jan. 11, stating that the brokerage service providers are prohibited from buying, holding or leveraging the digital coins, as outlined in the law enacted in 2017. Also banned is making equity investments with bitcoin. The rushed enactment resulted from heated criticism of government inaction despite rampant cryptocurrency speculation at the time.
As for futures, however, the issues are cleared because the derivative products track market indexes, not physical coins, it added.
On the same day, Bank of Korea Governor Rhee Chang-yong said cryptocurrencies were now “an official investment vehicle.”
“Bitcoin has definitely become an investment asset,” he told reporters. “Now it will be about the stability and vulnerability of the virtual asset. This is a step further from the previous debate on whether digital coins should and would be recognized as fiat currencies and the probability of them replacing traditional currencies.”
Difference in risks
Market watchers say futures ETFs are not any more volatile or speculation-oriented than existing futures or options trading.
This is because bitcoin futures concern the contracts between investors and bitcoin futures transactions operated by the Chicago Mercantile Exchange (CME), a U.S. derivatives exchange.
It means the risks of default, fraud remittances and account hackings are nonexistent, as guaranteed by the CME, a well-established financial investment system encompassing the digital coins as well as futures trading.
However, spot trading comes with much greater risks.
Spot transactions will enable direct management of the digital coins in the investment vehicle, subjecting investors and crypto brokerage service providers to an extreme fluctuation in valuations.
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler / Reuters-Yonhap
US ‘caved' to investor demands
The SEC approval was more about tolerating, not actively embracing the digital coins, industry insiders said.
SEC Chairman Gary Gensler said investors should be aware of the risks associated with the speculative assets, a comment that came immediately after the commission gave its approval.
Behind the clear reluctance toward cryptocurrency was U.S. financial authorities' failure to provide grounds to frustrate a claim by Grayscale, a U.S. digital currency asset management company.
Grayscale filed a suit in 2022 after the SEC denied its request seeking to create spot ETFs. The U.S. Federal Court of Appeals in Washington, D.C., found in favor of Grayscale the next year, essentially ruling the futures and spot ETFs are not materially different. The SEC did not appeal the decision.
“The U.S. authorities didn’t want to approve it, but had no way of stopping that in time,” an industry official close to the matter said. “The private sector holds greater say in the U.S., and investors there do not seek remedy with the government over failed investments.”
Buyers of troubled equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI) protest in front of the Financial Supervisory Service headquarters in Yeouido, Seoul, Jan. 19. Yonhap
Investor protection
The comment coincides with the heightened concerns of financial regulators, especially in light of skyrocketing losses from the troubled equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI).
Investor losses from high-risk, high-volatility derivatives make headlines every few months, and somehow the government always ends up taking the blame, according to the official.
“ELS is quite volatile, but not as much as bitcoin would be if spot trading was allowed,” he said. “Furious investors will want someone to take the fall. The accountability issues over what is mostly concluded as incomplete sales will weigh heavily on the authorities.”