[Inside Chodong] To Avoid Repeating the Single-Stock Leverage Fiasco with Spot Crypto ETFs

Investor Access and Asset Security Expected to Improve with Introduction

Thorough Preparation Needed, Taking Lessons from Single-Stock Leverage Incident

The introduction of spot virtual asset exchange-traded funds (ETFs) in the Korean financial market is becoming more tangible. The government announced in its ‘Economic Growth Strategy for the Second Half of 2026’ that it plans to revise the Financial Investment Services and Capital Markets Act to allow virtual assets to be included as underlying assets. Related research institutions have also proposed concrete plans for a Korea-specific adoption model.

Under the current Financial Investment Services and Capital Markets Act, the underlying assets of financial investment products are limited to financial investment products, currencies, agricultural, livestock, and marine products, mineral products, and general commodities such as energy. Because virtual assets are not recognized as eligible underlying assets for ETFs, domestic asset management firms have been unable to launch spot virtual asset ETFs. Given that ETFs are designed to track the prices of specific assets or indices, setting up and operating a spot ETF would require the asset manager to actually hold Bitcoin. However, the lack of legal eligibility for virtual assets as underlying assets meant there has been no legal basis for listing these funds on Korean stock exchanges.

As a result, Korea has fallen far behind the global market. Canada listed the world’s first spot Bitcoin ETF in 2021. Following approval in January 2024, the United States, with large-scale products such as BlackRock’s iShares Bitcoin Trust (IBIT), absorbed billions of dollars of institutional funds, firmly establishing itself as a major gateway for virtual asset investment. Hong Kong also adopted flexible regulations permitting spot holdings, seizing the lead as Asia’s digital financial hub. In Europe, countries such as Germany and the United Kingdom have established institutional-grade investment infrastructure by leveraging exchange-traded notes (ETNs) and physically backed structures. While major countries have been expanding the scope of their markets, Korea’s lack of regulated products has led investors to turn to overseas-listed ETFs or futures products, resulting in continued capital outflow. Meanwhile, investment through unregulated private exchanges or illegal channels, which exist in a regulatory blind spot, has proliferated, undermining investment soundness.

If spot virtual asset ETFs are formally introduced, these issues could be addressed. First, funds from institutional investors, such as national pension funds, would flow into what has been a retail-driven trading structure, thereby improving supply-demand stability. For investors, trading would become possible through existing securities accounts, eliminating the need to create separate coin exchange accounts or personal wallets and enhancing both accessibility and asset security. Clearer disclosure requirements and market surveillance at the institutional level, as well as clarified accounting and taxation frameworks for both corporations and individuals, would also have the positive effect of curbing capital outflow.

However, given the delayed introduction, it is important to thoroughly prepare for potential market shocks from these new high-risk products, rather than rushing in. The recent episode with single-stock leveraged ETFs in the domestic market provides a prominent example of how hasty rollouts can expose flaws in system design. While such products were introduced under the pretense of attracting overseas individual investor funds and revitalizing the market, the lack of preemptive safeguards against extreme volatility and liquidity concentration led to market turmoil. Ultimately, financial authorities halted new listings and announced supplementary measures, including stricter minimum deposit requirements.

Although Korea has been slow to enter the market compared to other countries, this head start may provide an opportunity to learn from other nations’ missteps and thoroughly refine outstanding issues. The single-stock leveraged ETF incident should serve as a lesson, and spot virtual asset ETFs should only be launched after a robust regulatory framework is in place.

This content was produced with the assistance of AI translation services.