A proposal has emerged that trading standards and an investor protection system must be put in place together to expand financial products and services using digital assets. It said there must be specifics on who holds investors' assets and how prices are set, and clarity on which entity bears responsibility when accidents occur.

At a forum titled 'Digital Asset Financial Innovation Cases and Response Strategies' held at Post Tower in Yeouido, Seoul, on Sept. 10, attorney Hyo-bong Kim (김효봉) of Bae, Kim & Lee, FnGuide researcher Seung-jin Lim (임승진) and Jin-sol Bok (복진솔), head of research at Populus Research, discussed development directions and domestic adoption tasks for digital-asset ETFs and on-chain asset management.

Kim explained that the combination of traditional finance and digital assets is advancing in both directions. He said the trend includes not only putting digital assets into ETFs, but also existing financial companies linking with blockchain-based decentralised finance, or DeFi, to provide new services.

In South Korea, a top task was presented as clarifying what qualifications operators have and how far they can perform their duties. Kim said detailed standards are needed on what requirements, beyond existing licences and approvals, should apply when securities firms offer brokerage services using digital assets or when payment gateway companies settle in stablecoins.

Kim said, "Whether it is a securities firm or a digital-asset operator, there are no standards for which licence they can provide the services they want under," and stressed the need for regulatory clarity from supervisory authorities and for legislative overhaul.

Lim proposed that legal grounds and an operational framework must be prepared together to introduce digital-asset ETFs. He cited as key tasks trustworthy price calculation, asset custody, creation and redemption, and conditions for risk management by market participants.

On pricing, he said authorities should aggregate quotes from multiple exchanges while reflecting trading volumes, set standards for excluding abnormal trades and establish response standards when an exchange faces disruptions. Relying on a single exchange price can allow disruptions or price distortions at that exchange to affect ETF valuation, he said.

He also presented the 'kimchi premium', where domestic digital-asset prices form higher than overseas, as a task. He said simply averaging domestic exchange prices would make it difficult to narrow domestic and overseas price gaps, so arbitrage routes should be reviewed together, including participation by financial firms and procuring spot assets overseas. He also said an information-sharing system is needed to enable monitoring by linking spot markets and ETF markets.

On custody, he proposed a plan in which a trust company takes responsibility and supervision while using the technology of specialised custodians. He said storing digital assets requires separate capabilities, including managing private keys and withdrawal authority and responding to network incidents, and that the scope of outsourced work and qualifications of custodians should be clarified.

He also stressed a trading structure to narrow the gap between ETF prices and the value of underlying assets. He proposed setting the scope of digital-asset trading and contributions so that creation and redemption by authorised participants, or APs, and quote provision by liquidity providers, or LPs, can proceed smoothly, and ensuring access to hedging tools such as futures.

Lim said, "The core of the system is to clarify who calculates prices, who holds assets and who performs creation and redemption, and to make those roles and responsibilities clear."

A 'vault' that manages funds on a blockchain was also discussed. Bok described a vault as a structure in which users deposit assets and operations are carried out according to a smart contract. Users receive tokens representing their deposit shares, and deposited assets are used in operating strategies such as lending or staking.

He paid particular attention to vaults in which a professional entity called a 'curator' is involved. He said curators analyse collateral and risks of investment targets and take on the role of setting allocation limits and operating strategies.

He said that, in that users use the judgement of a professional entity instead of directly comparing multiple lending markets, the structure performs functions similar to those of existing asset managers.

Bok said, "If it is easy to understand a vault as a fund on-chain, a curator can be understood as an asset manager."

He stressed, however, that operating via smart contracts does not make risks disappear. He said issues to examine include not only code vulnerabilities but also errors by oracles that deliver external price information, declines in collateral value and a lack of liquidity needed for withdrawals. He also cited as targets for review the risks of connected entities such as token-issuance platforms or custodians on which a specific vault depends.

Kim said, "In the legislative process, there needs to be more use of industry expertise," and added, "It would be good to have official procedures in place that can sufficiently reflect experts' opinions."