South Korea FSS Restricts ETF Exposure to Crypto Stocks Citing 2017 Guidelines Amid 10% Holdings Concerns

South Korea’s Financial Supervisory Service (FSS) has directed asset managers to curtail exposure to cryptocurrencies and related stocks in exchange-traded funds (ETFs), citing existing 2017 regulatory guidelines that prohibit corporate involvement in virtual assets. The directive, issued verbally to domestic firms, mandates that asset managers avoid excessive inclusion of crypto-linked equities such as Coinbase and Strategy in their portfolios. The FSS emphasized that the 2017 administrative guidance remains in effect, which prohibits financial institutions from holding, purchasing, or collateralizing virtual assets [1].

The move follows concerns over the rapid integration of crypto-related stocks into ETFs, with some domestic ETFs holding over 10% of their portfolios in “coin theme” stocks. For instance, the Korea Investment Trust Management’s “ACE US Stock Bestseller ETF” allocates 14.59% to Coinbase, while the “KoACT US Nasdaq Growth Company Active ETF” holds 7.44% of Coinbase and 6.04% of MicroStrategy, totaling 13.48% in crypto-linked stocks. These ETFs are passive and designed to track indices, making it challenging to adjust holdings without distorting index performance. Industry insiders noted that excluding specific stocks without altering the index could lead to significant tracking errors [1].

The FSS’s guidance has sparked debate among market participants. Critics argue that domestic ETFs face stricter scrutiny compared to U.S. counterparts, which allow indirect crypto exposure through foreign-listed funds. “Restricting only domestic ETFs won’t stop capital flows; investors are already using U.S. ETFs to bypass regulations,” one source observed. Others highlighted the complexity of reconciling the 2017 guidelines with current market trends, as the U.S. and South Korea have seen recent deregulatory shifts in crypto markets without formalized frameworks. An FSS official acknowledged that existing rules will remain until new legislation is established [1].

The directive aligns with South Korea’s longstanding stance on crypto risks. Since 2017, the country has banned corporate transactions in virtual assets to mitigate money laundering concerns, citing higher risks associated with institutional trading. The FSS’s recent action reinforces this position, though it has raised questions about its practicality. Passive ETFs, which cannot arbitrarily exclude stocks without violating index rules, are particularly constrained. Additionally, the regulatory focus on domestic ETFs appears to overlook the broader landscape, where investors can access crypto exposure through U.S. ETFs without local compliance hurdles [1].

The FSS’s intervention underscores South Korea’s cautious approach to crypto integration amid global regulatory divergence. While the U.S. has shown signs of easing crypto restrictions, South Korea maintains a stringent framework. This divergence could create arbitrage opportunities for investors, further complicating the effectiveness of localized regulations. Analysts note that until new laws are enacted, the 2017 guidelines will govern market conduct, leaving asset managers to navigate compliance challenges in a rapidly evolving sector.

Source:

[1] [South Korea FSS Restricts Including Crypto Stocks in ETFs](https://cryptonews.com/news/south-korea-fss-restricts-firms-from-including-crypto-stock-in-etfs/)

[2] [South Korean Regulator Orders Asset Managers to Cut](https://moneycheck.com/south-korean-regulator-orders-asset-managers-to-cut-crypto-etf-exposure/)