INSTITUTIONALIZING SPOT VIRTUAL ASSET ETFS IN KOREA

I. BACKGROUND

Following the implementation of the Act on Protection of Virtual Asset Users (the “Virtual Asset User Protection Act”) in July 2024, Korea’s regulatory framework for virtual assets is transitioning toward so-called “Phase 2” legislation. In parallel, the government is pursuing a policy of gradually opening the virtual asset market to corporate participation.

While a government draft bill for Phase 2 legislation is widely anticipated, it is generally expected that such a proposal is unlikely to include provisions addressing spot virtual asset exchange-traded funds (“spot virtual asset ETFs”). Even if separate legislation specifically addressing spot virtual asset ETFs were pursued, enactment in the near term appears unlikely. This is because a multi-dimensional review would be required to address the unique characteristics of the virtual asset market - such as (i) establishing custody and safekeeping infrastructure and (ii) permitting and promoting liquidity provision - while simultaneously amending and aligning related legal frameworks, including the Financial Investment Services and Capital Markets Act (the “FSCMA”). Notwithstanding these constraints, continued policy review of the institutionalization of spot virtual asset ETFs and related derivatives remains an important regulatory task.

The introduction of spot virtual asset ETFs and derivatives would further integrate virtual assets into the regulated financial system. Such developments could create new business opportunities across the broader ecosystem - including asset management, brokerage, custody/safekeeping, and index calculation - and expand the investor base by attracting medium- to long-term capital inflows. Moreover, by aligning Korea’s regulatory framework with developments in major jurisdictions, Korea could recapture domestic demand for indirect exposure to virtual assets that is currently being met through overseas ETFs and derivatives. Greater institutionalization may also enhance trust in emerging blockchain-based industries, thereby strengthening the international standing and growth potential of Korea’s virtual asset market.

At the same time, because these products are based on highly volatile underlying assets, several risks must be addressed. These risks include the potential expansion of speculative trading, concerns regarding the fairness and integrity of underlying spot prices and index methodologies, and the possibility of excessive risk-taking through derivatives. Accordingly, any institutional framework would likely need to be accompanied by robust regulatory safeguards, including enhanced market surveillance, strict standards for index calculation and custody structures, and strengthened investor-protection and risk-management requirements.

To date, Korea’s financial authorities have maintained the position that the issuance or brokerage of spot Bitcoin ETFs may raise concerns under the FSCMA. Against this backdrop, several legislative proposals have been introduced to institutionalize spot virtual asset ETFs and derivatives. Most recently, on November 24, 2025, the Democratic Party of Korea (with Rep. Park Sang-hyeok as the lead sponsor) introduced a bill titled the Act on Market and Industry of Digital Assets.

In the sections below, we review key legislative proposals relating to virtual assets and the institutionalization of spot virtual asset ETFs and derivatives, and outline considerations relevant to future regulatory design.

II. LEGISLATIVE PROPOSALS RELATED TO SPOT VIRTUAL ASSET ETFS AND DERIVATIVES 

1. Framework Acts on Digital Assets Introduced in the National Assembly

To date, several bills aimed at establishing a comprehensive regulatory framework for digital assets have been introduced in the National Assembly. A comparison of the key provisions of these proposals is summarized below.

2. Legislative Basis for Eligible Underlyings of Spot Virtual Asset ETFs and Virtual-Asset-Based Derivatives 

Among the digital-asset bills discussed above, the proposals that explicitly address spot ETFs and derivatives are the Digital Asset Market Integration Act (the “Kim Jae-sub bill”) and the Act on Market and Industry of Digital Assets (the “Park Sang-hyeok bill”).

The Kim Jae-sub bill defines digital assets as “underlying assets under Article 4(10) of the FSCMA.” While this approach brings digital assets within the statutory concept of an underlying asset, it does not specify which category of underlying asset digital assets fall into under the FSCMA. By contrast, the Park Sang-hyeok bill defines digital assets as “underlying assets under Article 4(10)3 of the FSCMA,” thereby classifying digital assets as “general commodities” within the FSCMA’s taxonomy. This approach appears to have referred to debates in the United States regarding whether virtual assets should be treated as securities or commodities. However, unlike in the United States - where the concept of “commodities” is defined broadly - the FSCMA defines “general commodities” narrowly as goods such as agricultural, livestock, fishery, forestry, mineral, or energy products, as well as goods manufactured or processed using such products as raw materials, and other similar goods. Given this statutory definition, it is difficult to view virtual assets as falling within the scope of “general commodities.”

Notwithstanding this classification issue, both bills adopt a common structural approach by expressly including digital assets among the eligible underlying assets under the FSCMA. This provides a legal basis not only for the issuance and trading of spot virtual asset ETFs, but also for the trading of derivatives that use virtual assets as their underlying assets. A notable distinction, however, is that the Park Sang-hyeok bill - unlike the Kim Jae-sub bill - would introduce new unfair-trading regulations specifically applicable to digital-asset-based derivatives.

Separately, a proposed amendment to the FSCMA introduced on June 27, 2025, would also include virtual assets as eligible underlyings by adding them as a new category of underlying asset under Article 4(10) of the FSCMA. This amendment would explicitly establish a legal basis for over-the-counter (OTC) derivatives transactions based on virtual assets, including transactions conducted through competitive bidding mechanisms.

3.  Legislative Proposals Relating to Safekeeping for Spot Virtual Asset ETFs

For spot virtual asset ETFs to be feasible in practice, the trust-related provisions of the FSCMA would also need to be reviewed and updated. In this regard, neither the Kim Jae-sub bill nor the Park Sang-hyeok bill introduces trust-specific rules; instead, both provide that the FSCMA applies to spot virtual asset ETFs unless otherwise expressly provided. As a result, additional amendments to the FSCMA and its subordinate regulations would likely be required.

In this respect, the proposed FSCMA amendment sponsored by Rep. Min Byeong-deok is comparatively comprehensive. The proposal does: 

(1) expand the categories of permissible trust property - currently limited to money, securities, monetary claims, movables, and real estate - to expressly include virtual assets;

(2) allow trust companies, subject to prescribed requirements, to outsource core functions such as safekeeping and administration of trust property to qualified virtual asset service providers (VASPs), thereby enabling the outsourcing of virtual-asset-related trust functions; and

(3) impose new obligations on trust companies that outsource such functions, including duties to assess the VASP’s expertise and financial soundness and to conduct periodic monitoring, with appropriate remedial measures where necessary.

4. Pricing/Indices and Liquidity Provision for Spot Virtual Asset ETFs

Under Article 246 of the Enforcement Decree of the FSCMA and Article 7-26 of the Financial Investment Business Regulations, an exchange-traded fund (ETF) must satisfy certain requirements with respect to the price or index of its underlying asset. In particular, the price or index must be based on instruments traded on a recognized market - such as the Korea Exchange (KRX) or an overseas exchange - must be disclosed to investors on a daily basis at reliable prices and must be calculated by a credible institution. In addition, under Article 113 of the KRX Securities Market Listing Regulations, an ETF listing requires at least one Authorized Participant (AP), and the issuer must enter into a liquidity provision agreement with at least one AP. Liquidity providers are generally required to, among other things, help manage deviations between market price and net asset value (NAV) and to submit bid and ask quotes where quotation gaps arise.

Against this regulatory backdrop, making spot virtual asset ETFs operational in Korea would require more than simply addressing issues related to underlying assets and safekeeping. A coherent and aligned set of amendments across the FSCMA, its subordinate regulations, and KRX rules would also be necessary to ensure effective administration and orderly market functioning. Key areas for alignment include: (i) pricing and index calculation frameworks, including permissible methodologies and index administrators; (ii) whether, and to what extent, corporate entities may participate in virtual asset trading; and (iii) the design of AP and liquidity-provision arrangements, including the availability of effective hedging and risk-management tools.

5. Indirect ETF and EMP 

Separately, given expectations that legislative developments may take considerable time, some have proposed introducing - within the existing regulatory framework - products such as indirect (fund of funds) ETFs and EMP products as interim measures.

An indirect ETF refers to a structure in which a Korean ETF invests in overseas-listed spot digital-asset ETFs. An EMP public fund refers to a portfolio product that allocates across a mix of instruments - such as spot and futures digital-asset ETFs, mining and blockchain-related equity ETFs, and gold and bond ETFs - and is managed on an integrated basis.

The core rationale for these structures is that they do not directly hold virtual assets as underlying assets. Accordingly, if the Financial Services Commission were to issue an interpretive position confirming that indirect ETF and EMP structures do not constitute “direct holdings” of digital assets, such products could potentially be launched relatively quickly without legislative amendments. Given the constraints of the current legal framework, these alternatives may need be carefully reviewed as practical interim options.

III. IMPLICATIONS

The fact that multiple Phase 2 digital asset bills have already been introduced in the National Assembly - and that a government bill is expected in the near term - together with the introduction of the FSCMA amendments addressing underlying-asset eligibility and safekeeping structures for spot virtual asset ETFs, represents a positive development for advancing Korea’s virtual asset regulatory framework and the institutionalization of new financial products. In particular, once Phase 2 legislation is finalized and implemented, more substantive and focused discussions regarding spot virtual asset ETFs are likely to follow.

To support this process, it will be important for market participants to engage proactively with regulators and legislators on practical implementation issues, as well as areas requiring further review and policy refinement. At the same time, from the perspective of user protection and effective supervision, the regulatory framework must be realistic and workable in practice. This calls for a balanced approach that considers market structure, technical characteristics of blockchain-based assets and evolving international regulatory trends.