South Korea’s Financial Supervisory Service Advises Asset Managers to Limit Crypto Exposure
The Financial Supervisory Service (FSS) of South Korea has verbally advised local asset managers to avoid excessive investment in companies heavily tied to cryptocurrencies, according to a report by The Korea Herald.
The advisory specifically mentioned US-listed companies like Coinbase and MicroStrategy, which hold significant crypto reserves, as examples of concentration risks.
FSS officials reportedly provided non-binding oral guidance. The impact is mitigated as South Korean passive exchange-traded funds (ETFs) face operational constraints in removing sensitive holdings.
“Since we track the index directly, removing a stock without an index change could result in large tracking errors. We understand the regulatory stance but cannot respond immediately,” said an anonymous fund manager.
FSS acknowledged these practical limitations and emphasized that its remarks are preliminary recommendations aimed at encouraging caution in ETF design until new regulations are finalized. However, some market participants expressed concerns about the fairness of targeting domestic products while foreign crypto ETFs remain accessible.
“Restricting domestic ETFs won’t stop capital flows. Investors are already going around these rules via U.S. products,” stated an industry source. “It’s questionable whether this regulation is even effective.”
Rising Crypto Allocation in South Korean ETFs
The demand for crypto exposure in South Korean passive funds appears strong. For instance:
- Korea Investment Management’s Ace US Stock Bestseller ETF: Maintains 14.6% stake in Coinbase
- KoACT Nasdaq Growth Active ETF: Holds 7.4% Coinbase and 6% MicroStrategy
- KoACT Global AI & Robotics Active ETF: Includes 10.3% Coinbase
- Timefolio Nasdaq 100 Active ETF: Features crypto-related holdings constituting 11% exposure
Simultaneously, the FSS maintained its official position prohibiting local institutions from holding, acquiring, investing in, or using cryptocurrency as collateral. A spokesperson noted:
“Although both US and Korean regulators are showing signs of easing crypto rules, no concrete laws or guidelines have been implemented. Until new frameworks are in place, existing rules must be followed.”
This developing stance follows recent regulatory signals of openness. Earlier this month, the Ministry of SMEs and Startups proposed ending crypto industry exclusion from certain tax breaks. Additionally, major South Korean banks saw their shares surge after filing trademarks for stablecoin issuance, suggesting growing fintech interest in digital assets despite tentative initial FSS prohibitions.
Related: South Korea’s central bank BOE postpones CBDC testing amid stablecoin support momentum.
The Bank of Korea previously indicated an aim for licensed institutions to predominantly issue stablecoins, gradually expanding market participation, with pilot projects expected by 2026.
For Further Reading:
- South Korean young people turning to crypto out of desperation
- Korea to lift corporate crypto ban, beware crypto mining HDDs: Asia Express
- Subscription Form: Markets Outlook
