- South Korea’s FSS urges caution on ETFs heavily exposed to Coinbase and crypto firms.
- Regulatory gaps from 2017 guidelines raise concerns over ETF crypto stock exposure.
- Korean investors bypass local limits through U.S. ETFs amid rising global crypto support.
South Korea’s Financial Supervisory Service (FSS) has issued a cautionary signal to domestic asset managers, urging them to refrain from significantly increasing the allocation of virtual asset-related stocks particularly Coinbase in their exchange-traded fund (ETF) portfolios.
This advisory, given verbally in early July, comes amid a global surge in interest in cryptocurrency-related equities and a growing trend among Korean ETFs to include such stocks. The FSS’s stance appears to be a preemptive move to reassert the relevance of South Korea’s 2017 virtual asset guidelines in the absence of updated legislation.
Balancing Innovation With Regulatory Stability
The FSS’s guidance is largely a response to recent developments in global markets. As the U.S. continues to ease its stance on digital assets, South Korean ETFs are increasingly mirroring this trend.
For example, Korea Investment Trust Management’s ‘ACE US Stock Bestseller ETF’ holds 14.59% in Coinbase. Similarly, ‘KoACT US Nasdaq Growth Company Active ETF’ has nearly 13.5% exposure to Coinbase and MicroStrategy combined.
However, the FSS is concerned that this growing exposure may create regulatory risks. The 2017 administrative order still prohibits institutional players from owning or trading virtual assets directly. While these ETFs don’t hold digital currencies, the companies they invest in are often deeply integrated into the crypto ecosystem. This makes compliance a gray area.
The FSS’s message isn’t a binding restriction but rather a precautionary measure. Regulators emphasized the need for caution, especially given the absence of an updated legal framework for digital asset investments.
Passive vs. Active Management Challenge
The divide between passive and active ETFs adds complexity to the issue. Active ETFs can adjust their holdings based on the manager’s strategy. Passive ETFs, however, mirror specific indices and can’t easily exclude certain stocks without altering the index itself.
An FSS official acknowledged this structural limitation but maintained that the advisory encourages careful product design until new regulations emerge. Asset managers argue that abrupt exclusion of crypto-related stocks could distort tracking error and hurt investor confidence.
Investors Find Loopholes Through U.S. ETFs
While the FSS targets domestic funds, investors are increasingly turning to U.S.-listed ETFs for crypto exposure. Products like those from MicroStrategy and Coinbase allow Korean investors to bypass local restrictions.
Political developments also fuel this momentum. U.S. presidential candidate Donald Trump’s pro-crypto stance and former Korean candidate Lee Jae-myung’s Bitcoin ETF proposal have amplified interest in the space.
