South Korea FSS Directs ETFs to Cut Coinbase, MicroStrategy Exposure Citing 2017 Policy

South Korea’s Financial Supervisory Service (FSS) has issued a verbal directive to local asset managers, urging them to curtail exposure to crypto-linked stocks such as Coinbase (COIN) and MicroStrategy (MSTR) within ETFs. The regulator cited a 2017 policy prohibiting institutional investment in virtual assets, emphasizing that existing rules remain in force despite ongoing regulatory reforms [1][2]. The guidance, communicated informally to firms earlier this month, highlights concerns over excessive portfolio concentrations in firms tied to the crypto sector, such as Coinbase and MicroStrategy, which are frequently included in ETFs tracking crypto-related industries [2]. For example, Korea Investment Management’s “ACE U.S. Bestseller ETF” currently holds over 14% of its portfolio in Coinbase shares, a practice the FSS warned against [1].

The FSS clarified that asset managers must adhere to the 2017 directive, which bars institutions from directly holding or investing in virtual assets or companies primarily engaged in the sector. While the regulator acknowledged that passive ETFs cannot easily divest specific stocks without index adjustments, it urged caution in designing new products to avoid overexposure. This directive aligns with South Korea’s broader caution toward crypto-linked financial instruments, even as the country begins phasing out its de facto ban on institutional crypto trading. Public companies and professional investors are expected to gain trading permissions by mid-2025, following a recent policy shift allowing nonprofit entities to liquidate donated crypto assets [2].

The FSS’s timing has sparked debate, as South Korea’s financial landscape is evolving. Last month, the Financial Services Commission proposed a roadmap to legalize spot crypto ETFs by the second half of this year, reflecting growing bipartisan support for crypto-friendly policies. Political parties have backed legislation to dismantle restrictive rules, such as the “One Exchange, One Bank” policy, and to reduce trading costs to attract younger investors [2]. President Lee Jae-myung, a vocal crypto advocate, has prioritized regulatory clarity and institutionalization of crypto assets since his election. However, the FSS’s warning underscores the tension between fostering innovation and mitigating risks tied to volatile crypto markets [5].

Analysts note that the FSS’s intervention could force ETF managers to rebalance portfolios, potentially reducing allocations to crypto-linked equities like Coinbase and MicroStrategy. While such stocks offer high-growth potential, their performance remains closely tied to the speculative nature of crypto markets. The directive also raises questions about how South Korea’s cautious approach will contrast with more permissive jurisdictions like the U.S., where regulators have signaled openness to crypto ETF approvals [2].

The FSS emphasized that its action aims to safeguard investor protection and financial stability ahead of a formal regulatory overhaul. This aligns with global trends where authorities increasingly prioritize risk mitigation amid the crypto sector’s integration into traditional finance. However, critics argue that the FSS’s stance could hinder fintech innovation in a market already grappling with youth unemployment and economic uncertainty [5].

As the crypto-ETF landscape evolves, South Korea’s regulatory balancing act will likely shape broader market dynamics. The FSS’s focus on compliance with existing rules, while reforms are finalized, reflects a cautious yet adaptive strategy. This approach mirrors global efforts to reconcile the disruptive potential of crypto assets with the need for systemic safeguards, particularly as tokenized assets and blockchain-based products gain traction [6].

Sources:

[1] [Coinbase, Strategy named as South Korea warns against crypto-heavy ETF portfolios](https://coinmarketcap.com/community/articles/6880a80d5e55e6207ac97c59/)

[2] [South Korea Cautions Against Crypto-Focused ETFs](https://m.economictimes.com/crypto-news-today-live-23-jul-2025/liveblog/122843865.cms)

[3] [S. Korea's FSS Asks ETFs to Cut COIN And MSTR Stocks](https://coingape.com/s-koreas-fss-asks-etfs-to-cut-coinbase-and-microstrategy-stocks/)

[5] [Can Crypto Assets Reshape South Korea's Economic Outlook?](https://www.panewslab.com/en/articles/1csafn9q)

[6] [The Risks And Rewards Of Tokenization As Crypto Heavyweights Push For It](https://www.barchart.com/index.php/story/news/33529316/the-risks-and-rewards-of-tokenization-as-crypto-heavyweights-push-for-it)