South Korea Proposes Legal Framework for Digital Asset ETFs

Min Byung-deok, a member of the South Korea Democratic Party, introduced a bill on June 27 to amend the Capital Markets Act. The proposal aims to expand the scope of underlying assets for exchange-traded funds (ETFs) to include digital assets such as Bitcoin. This amendment would establish a legal framework allowing trust companies to hold and manage digital assets as trust property. It also outlines conditions for delegating custody of virtual assets to registered service providers.

The bill is part of President Lee Jae-myung’s agenda to integrate digital assets into the financial system. A separate roadmap from the Financial Services Commission would permit institutional investors with more than KRW 10 billion in assets to trade virtual assets beginning in late 2025. Supporters of the amendment argue that it provides a legal foundation for digital asset-based ETFs and improves investor protections through clear rules on trust management. It also includes measures to expand the derivatives market, allowing risk management strategies using digital assets.

However, skeptics argue that brokering digital asset derivatives requires strict risk management. Some industry participants suggest that only firms with sufficient capacity should be allowed to offer such products. Currently, South Korea prohibits ETFs that use digital assets as underlying assets, forcing domestic investors to trade abroad or rely on unregulated markets. The new measure could create a regulated pathway to participate in this market domestically.

If approved, the amendment would allow asset managers to develop financial products tied to digital assets, increase ETF market diversity, and boost transparency and oversight in the sector. Min Byung-deok stated that the bill would promote growth while strengthening protections for Korean investors. While global regulators weigh frameworks for digital asset ETFs, many jurisdictions still grapple with basic questions of valuation, custody, and cross-border compliance. In the absence of uniform standards, countries often move at different speeds, which can lead to regulatory arbitrage and inconsistent protections for investors.

Industry observers say any shift in ETF rules could influence broader debates over digital asset taxation, reporting standards, and how digital finance fits into national growth strategies. The amendment could also have implications for trust management, derivatives markets, and investor protections. Some industry figures warn that brokering derivatives tied to digital assets requires rigorous risk controls, and only firms with sufficient capacity should be allowed to offer such products.