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South Korea Delays Crypto ETF Plans Amid Regulatory Hesitations

South Korea’s ruling party considers changes to its crypto policy

South Korea's political landscape experienced a significant shift when the ruling People Power Party, under the leadership of Rep. Yoon Chang-hyun, retracted its commitment to deregulate the cryptocurrency market. Initially, the party had signaled intentions to introduce a series of reforms aimed at easing restrictions on cryptocurrencies, including the highly anticipated authorization of local spot Bitcoin Exchange-Traded Funds (ETFs). This move was part of a broader virtual asset pledge expected to be announced last week, yet it has been postponed indefinitely, leaving stakeholders in a state of uncertainty.

The backtrack can largely be attributed to the complexities of aligning the proposed policies with existing government and financial regulatory frameworks. Despite earlier reports this month hinting at the party's bold election promises to delay taxing crypto profits and allow domestic institutions to launch spot Bitcoin ETFs and invest directly in cryptocurrencies, these initiatives have hit a snag. 

The People Power Party's decision to remove virtual assets from its policy priorities underscores the ongoing challenges within South Korea's regulatory environment, particularly in reconciling the innovative potential of cryptocurrencies with prudent financial oversight.

In January, the nation's financial regulator reinforced its stance by reiterating a ban on financial institutions from offering cryptocurrency ETFs, arguing that virtual assets do not meet the Capital Markets Act's criteria for underlying assets. This position highlights the regulatory hurdles facing local investors, who are currently restricted from investing in spot crypto ETFs, though foreign crypto futures products remain within reach.

Regulatory roadblocks and future prospects

Despite the global cryptocurrency market witnessing progressive milestones, such as the United States Securities and Exchange Commission's (SEC) recent approval of the spot Bitcoin ETF, South Korea maintains a reserved stance. This caution stems from a deep-seated concern over the investment risks associated with virtual assets, a viewpoint that significantly influences the nation's policy direction.

The opposition Democratic Party's official announcement of its crypto campaign promises juxtaposes the ruling party's indefinite delay, highlighting the political divide on the future of cryptocurrency in South Korea. As the general election looms on April 10, the discourse around crypto ETFs and the broader regulatory environment for virtual assets becomes increasingly pertinent. The People Power Party's consideration of a proposal to delay taxation on virtual assets for two years and allow corporate investments signifies a potential shift in strategy.

South Korea's Financial Supervisory Service (FSS) is actively seeking guidance from international counterparts, including the SEC, on navigating the complexities of spot Bitcoin exchange-traded funds. The FSS chief, Lee Bok-Hyun, outlines a 2024 business plan that prioritizes understanding and possibly integrating global best practices into South Korea's regulatory framework. This includes planned visits to key financial markets, with a focus on discussions surrounding the viability and regulation of spot Bitcoin ETFs in the South Korean context.