Virtual Asset ETFs Should Be Introduced Gradually Starting with Spot ETFs

To introduce domestic virtual asset (digital asset) exchange-traded funds (ETFs), it has been suggested that the process should begin with the simpler structure of spot ETFs, gradually verifying market infrastructure and risk management systems.

Im Seung-jin, a researcher at FN Guide, made this statement during a presentation on "The Development and Institutionalization of Digital Asset ETFs" at the seminar titled "Innovative Cases and Response Strategies for Digital Asset Finance" held at the Post Tower in Yeouido, Seoul, on the 10th.

Researcher Im stated, "The starting point for the introduction of digital asset ETFs is to understand the legal status of digital assets," adding that "the current legal definition of underlying assets does not include digital assets, so there is a lack of clear grounds for issuing spot ETFs."

He further explained, "Since derivatives are also based on underlying assets, there is a lack of clear grounds for their issuance as well. To issue digital asset futures or ETFs domestically, the legal basis for recognizing and trading underlying assets must be clarified."

After establishing the legal basis, it is essential to build market infrastructure for pricing, custody, creation, and redemption to ensure the actual operation of the ETF market.

Regarding the prices that ETFs will track, Im noted, "The mere fact that a virtual asset business operator is subject to reporting does not mean that the exchange is recognized as an eligible market for ETFs," emphasizing that "the reliability of prices, market structure, and information requirements must be specified, and based on this, the scope of eligible markets must be determined."

He also pointed out, "Relying on the price of a single exchange can make it vulnerable to trading disruptions and price distortions," suggesting that a comprehensive approach to exchange prices should be taken, considering trading volumes and establishing pricing methods, standards for abnormal trading, and criteria for when disruptions occur.

He believes that a system for sharing information between the spot market and the ETF market is also necessary.

He stated, "We need to establish a structure and procedures for information sharing to maintain the connection between the spot and ETF markets," adding that "to ultimately create a reliable market, conditions must be in place for not only digital asset prices but also for trading and market mechanisms to function."

Custody of digital assets was also identified as a key issue.

Im explained, "We need different standards from traditional securities custody because we must separate the private keys and withdrawal rights of digital assets and prepare for network incidents."

He suggested that trust companies, such as banks, could take on custody responsibilities while utilizing the technical capabilities of specialized custody institutions, but emphasized that custody institutions must meet the necessary licensing or registration requirements and clarify the scope of custody and the roles of custodians.

He stressed the need for a trading structure to reduce the gap between ETF prices and underlying asset prices.

Im stated, "Once the pricing and custody systems are established, a structure for actual trading is also necessary," explaining that "when a difference arises between ETF prices and the value of underlying assets, market participants should be able to trade the assets or perform creation and redemption."

He noted that the characteristic of digital assets being traded 24/7 should also be considered.

Im remarked, "Since digital assets are traded 24 hours a day, price fluctuations during the time the securities market is closed can be reflected all at once when it opens," and emphasized that domestic spot trading volumes and ETF liquidity must be secured to respond to settlement delays.

He also indicated that the price limit system requires separate consideration.

He stated, "If we apply the 30% price limit based on the standard price applicable to general ETFs, it may not sufficiently reflect the value of the underlying asset when it changes significantly, leading to a gap with the spot value," and suggested that measures to manage price limits, volatility dampening mechanisms, and deviation rates should be examined.

Im proposed that after these systems and infrastructures are established, the range of products should be gradually expanded.

He stated, "The criteria for the phased order should be based on verified ranges rather than profitability," emphasizing that "we should start with the simpler structure of spot ETFs first."

He added, "We need to verify whether the pricing, custody, and creation/redemption systems operate stably," explaining that "once the market system stabilizes, we can transition to a multi-asset strategy."

In the next phase, he believes it can be expanded to staking and on-chain income products.

However, he explained that liquidity management is key for staking products. Im noted, "Increasing the proportion of staking can increase rewards, but it also reduces liquidity. Conversely, holding sufficient cash or liquid assets makes redemption easier but reduces reward opportunities."

Regarding liquidity staking tokens (LST), he explained, "Staked assets remain intact, but investors can transfer LST to others or trade them in the market to secure liquidity."

However, he cautioned that "if liquidity is insufficient or market prices fall below the value of underlying assets, trades may occur at unfavorable prices," and emphasized that the operation of smart contracts and protocols should also be reviewed.

Im stressed, "What is important is not how much to increase the products, but to move to the next stage based on the operational experience gained at this stage and the current level of scale."

He concluded by stating, "Legally, we need to establish the recognition of digital assets and the basis for custody, and in regulations, we need to specify the scope of participants' duties and investor protection standards.

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