South Korea's Stance on Virtual Currency Investment and ETFs in 2024

South Korea has reasserted its stringent position on virtual currency investments. The country's top financial regulator, the Financial Services Commission (FSC), has unequivocally stated that it will continue to enforce its policy that restricts financial institutions from launching cryptocurrency exchange-traded funds (ETFs). This stance comes despite the increasing global acceptance of cryptocurrencies and the approval of crypto ETFs in the United States.

The Financial Services Commission has articulated that the decision to uphold the ban is rooted in the need to ensure the stability of financial markets and protect investors. According to local media reports, an official of the FSC highlighted that the approval of spot bitcoin ETFs in the U.S. does not influence Korea's regulatory approach. The regulator's firm stance reflects a cautious attitude towards the volatile nature of cryptocurrencies and a commitment to safeguarding the traditional financial system.

South Korea's existing capital markets act limits the scope of underlying assets for investment contract securities, such as ETFs, to traditional financial investment instruments, currencies, and commodities. Cryptocurrencies, not being recognized as financial assets in South Korea, fall outside the purview of permissible investments for financial institutions. This policy has been in place since 2017 and remains a cornerstone of South Korea's approach to managing the risks associated with digital currencies.

In addition to the ETF ban, South Korea is also working on comprehensive crypto regulation, which is being developed in two parts. The first part of this regulation, passed last year, is set to come into effect in July 2024. This legislation will establish clear rules regarding the issuance, listing, and delisting of cryptocurrencies. The second part of the regulation is still under construction and aims to further refine the legal framework governing digital assets.

Another significant aspect of South Korea's regulatory framework is the Virtual Asset User Protection Act, scheduled to be enforced from July 19, 2024. This Act will enforce specific regulations for improved user safety and market stability in the virtual asset sector. Notably, the Financial Services Commission has declared that NFTs (Non-Fungible Tokens) and CBDCs (Central Bank Digital Currencies) are exempt from these regulations.

The recent developments indicate a cautious but evolving approach by South Korean authorities towards cryptocurrency and digital assets. While maintaining strict control over traditional financial institutions' involvement in crypto, the government is also laying down a foundation for a regulated and secure environment for digital asset transactions.