Bitcoin ETF Acceptance Theory Spreads… But Custody and Brokers Are ‘Blank’

Recently, presidential candidates from both parties are competing to promise the approval of a Bitcoin spot ETF, but there are concerns that infrastructure must be established first. This is because key infrastructure such as custody and prime brokerage, which are essential for ETF operations, are not properly prepared domestically. Voices are rising to actively encourage financial institutions' participation and build the market foundation.





According to the industry on the 26th, to compose a virtual asset spot ETF, the roles of businesses specializing in handling virtual assets such as custody, prime brokerage, and liquidity providers are necessary. Unlike general ETFs, separate infrastructure is essential as physical virtual assets must be directly handled.

For example, the 'iShares Bitcoin Trust (IBIT)' managed by BlackRock converts cash deposited by Authorized Participants (AP) into BTC through Coinbase Prime Broker for creating new ETF shares. At this time, Coinbase Prime connects with non-bank market makers (NBMM) beyond its own exchange to execute transactions. They provide real-time quotes in over-the-counter markets or global exchanges. The acquired BTC is incorporated into the trust asset through Coinbase Custody. For an ETF based on virtual assets to operate, an organic infrastructure connecting physical asset trading to storage must be in place.

The problem is that the related industry domestically is still small-scale. Custody companies include KODA, KDAC, Infinite Block, and BDAX. While all these companies have received equity investments from financial institutions, they remain at the startup level. Even if Bitcoin spot ETF is actually allowed, they are insufficient to stably custody assets worth hundreds of billions of won. The prime brokerage sector, which purchases, transfers, custody, and hedges virtual assets on behalf of institutional investors, is similar. While companies like Wavebridge and Happy Block provide services, they are far behind traditional financial institutions in capital and system scale. Accordingly, many related companies are reportedly conducting investment attraction briefings to bulk up.

For market makers, the situation is more difficult. Under the current Virtual Asset User Protection Act, any transaction intended to fix or change prices is considered unfair trading. Thus, market-making (MM) activities by third parties supplying liquidity are essentially prohibited.



The industry is increasingly calling for infrastructure to be organized before discussing the mere permission of virtual asset ETFs. The Financial Services Commission took a cautious stance in February's 'Roadmap for Corporate Participation in Virtual Asset Market', stating that direct trading and holding of virtual assets by financial companies will be reviewed medium to long-term. Instead, they announced plans to relax holding company investment restrictions to enable various investments in fintech and blockchain companies, but no specific legislation or policy follow-up measures have emerged yet.

A financial industry official said, "Institutional improvements are needed to allow startups with innovative technologies to actively collaborate with financial institutions" and "This will enhance the competitiveness of the virtual asset industry as a whole".

Jung Gu-tae, CEO of Infinite Block, explained at the 'K-Bitcoin Spot ETF Conference' this month that "In the US, the day after the SEC approved Bitcoin spot ETF in January last year, it was immediately listed on the exchange" because the related infrastructure was already in place. He emphasized, "In contrast, even if the Korean government allows virtual asset spot ETF now, it will take considerable time for the actual product to be launched" and "Fostering various virtual asset businesses should be prioritized".

Reporter Do Ye-ri