Ethereum's price is displayed on the trading board of Upbit, a local crypto exchange, Seoul on May 21. (Newsis)

While the US Securities and Exchange Commission made another move to embrace cryptocurrency by approving exchange-traded funds tied to the price of ether, the most famous crypto after bitcoin, spot cryptocurrency ETFs remain out of reach for South Korean investors.

On May 23, the US SEC gave the green light for eight spot ether ETFs, potentially paving the way for the funds to begin trading later this year. The decision came four months after its landmark approval on spot bitcoin ETFs.

For Korea, however, spot crypto ETFs remain a long way off, even though the country is known to be a market with high demand for cryptocurrencies.

In the first three months of this year, the Korean won was the most-used currency in the world for trading crypto on centralized exchanges, recording $456 billion in cumulative trade volume, according to crypto analytics firm Kaiko Research. It even surpassed $445 billion in the US dollar volume.

Yet the local authorities have not yet lowered their guard against the crypto market.

When funds tied to bitcoin prices were listed in the US earlier this year, local regulator the Financial Services Commission announced brokering spot crypto ETFs could go against the government's stance as the local Capital Market Act does not stipulate virtual assets to be identified as an underlying asset for securities.

While the industry views that spot crypto ETFs can be introduced here under the approval of the FSC if it allows a wider definition of the underlying assets, experts claim a revision of the related law is necessary.

Adding on to the dispute on the identification of underlying assets, the role of custody has to be clarified as well. Unlike future crypto ETFs, fund issuers must hold custody of the cryptocurrencies in contract with exchanges or other services to run spot crypto ETFs.

“Without a law revision, it would be complete chaos. We cannot afford to dispute the legal terms in court after allowing investors and firms to trade such products. The revision must come first,” Kim Kab-lae, senior research fellow at the Korea Capital Market Institute and head of the Financial Law Research Center, said.

“The National Assembly should speed up the law revision in partnership with the financial regulators, paving the way for Korean financial investment businesses to launch competitive products on a global scale. Otherwise, Korea will miss out on such opportunities.”

In an attempt to win votes from the crypto-enthusiastic public, both rival political parties maintain a digital asset-friendly stance.

While the ruling People Power Party pledged to prioritize introducing a regulatory framework for virtual assets to boost the market in April’s general election, the opposition Democratic Party of Korea vowed to enable local financial institutions to launch spot crypto ETFs.

Though maintaining a firm stance on banning spot crypto ETFs, local authorities are continuing to keep an eye out for the fast-growing crypto market.

The FSC is reportedly pushing to launch a separate division to handle virtual assets. Currently, a division under the Financial Innovation Bureau oversees diverse digital finance affairs from virtual assets to fintech. The new division will focus on virtual asset policies in line with the Act On The Protection Of Virtual Asset Users, which will be enacted in July.

On May 14, Financial Supervisory Service Gov. Lee Bok-hyun met SEC Chair Gary Gensler during his visit to the US and discussed the agency’s approval of spot bitcoin ETFs. He also met with Commodity Futures Trading Commission Chair Rostin Behnam and shared views on the latest legislation moves regarding virtual assets.

Meanwhile, competition in the global crypto ETF market is heating up. While countries such as Canada, Germany and Brazil have incorporated spot bitcoin ETFs, Hong Kong was the first country in Asia to see the debut of spot cryptocurrency ETFs in April. In the Asia-Pacific region, Australia's top exchange is also expected to approve the fund this year.

With the holdback in regulations, Korea could be left behind from engaging in lucrative opportunities with the crypto investment vehicle, which is expected to bring a wider batch of institutional investors into the market.

“The local crypto market exhibits relatively high price volatility partly due to the tight regulations on trading. Diversification of the investment tool could stabilize the market,” an official from a local crypto exchange said.