South Korea Needs to Close Kimchi Premium, Build Futures Market Before Spot Crypto ETF Launch

As major financial centers including the US, Hong Kong and Japan have launched or are preparing to launch spot digital-asset exchange-traded funds, a new report sets out the steps South Korea must take before allowing similar products.

A study on introducing exchange-listed virtual-asset products, submitted to the Korea Exchange at the request of Democratic Party lawmaker Ahn Do-geol, outlined institutional changes needed for spot digital-asset ETFs in South Korea, according to industry officials on July 15.

The report said the Capital Markets Act must first be revised to include virtual assets among assets eligible to underlie ETFs. Under current law, ETF underlying assets are limited to financial investment products, currencies and general commodities, making spot crypto ETFs impossible to launch.

It also identified the so-called kimchi premium, the price gap between domestic and overseas markets, as a key issue to address. The report said the gap could be narrowed by allowing ETF managers to source spot holdings from overseas platforms and by encouraging arbitrage by authorized participants, or APs.

The report also called for a crypto futures market to manage price risk arising during spot ETF operations. That would give APs the market infrastructure needed to hedge price swings during ETF creation and redemption.

It proposed launching a spot Bitcoin ETF first and then gradually allowing altcoin ETFs based on operational experience. The report also said South Korea should create a specialized digital-asset trust license and revise rules so securities firms can serve as prime brokers.