South Korea’s Financial Supervisory Service (FSS) has tightened its grip on crypto-exchange-traded funds (ETFs) in the country. According to local news outlet The Korea Herald, the regulatory body verbally directed domestic asset managers to limit their exposure to crypto-related stocks, especially those of Coinbase and Strategy, since they are often included in ETFs tracking crypto-related industries.
The FSS’s latest move is likely a response to the recent surge in inclusion of “coin theme” stocks in the ETF market.
The South Korean top financial regulator pointed to the 2017 Financial Services Commission’s (FSC) policy that prohibits regulated financial institutions from holding or investing in digital asset-related equities. They insisted that the policy’s rules are still in effect.
FSS Policy Raises Eyebrows
Following the FSS’s announcement, the industry raised concerns about the fairness of the policy as it applies only to domestic ETFs. Their concerns stem from the fact that retail investors may bypass the market and make investments through US-listed ETFs that include stocks related to virtual assets.
Meanwhile, it would be challenging for domestic financial players in the country, including asset management companies, to comply with the FSS’s guidance without changing their underlying assets, as their structure is designed to track a specific asset.
Some of these domestically listed ETFs have significant holdings in crypto-related stocks, exceeding 10% in some cases. For instance, the ACE US Stock Best-selling ETF holds 14.59% of Coinbase, while the KoACT US Nasdaq Growth Company Active ETF holds 7.44% of Coinbase and 6.04% of Strategy.
Concerning this issue, an FSS official explained in a translated version:
“We are fully aware that passive ETFs cannot be excluded at the discretion of the asset management company because their structure directly follows the underlying index.” The official continued, “This statement is intended to encourage caution in the overall design of ETF products until the system is reorganized.”
The official further explained that existing guidelines should be followed until new laws or regulations are established.
South Korea’s Crypto Stance
Although South Korea did not impose an outright ban on crypto investments for its citizens, the country’s regulatory approach reveals a cautious approach towards the asset class.
In March, the country’s central bank government, in a reply to a written query from Representative Cha Gyu-geun, rejected Bitcoin as a foreign exchange reserve, citing the asset’s volatility, lack of regulation, and limited mainstream adoption as key factors behind its cautious stance.
