South Korean financial watchdog has thrown cold water on the crypto ambitions of local asset management firms, ordering them to dial back their exposure to digital asset companies like Coinbase and Strategy.
The Financial Supervisory Service (FSS) issued verbal guidance this month reinforcing 2017 regulations that ban financial institutions from investing in virtual assets or related equities—creating a storm of controversy in the process.
The directive has sparked fierce criticism from domestic financial entities who argue they’re being unfairly handicapped while retail investors continue to access US-based crypto ETFs without restriction. Despite ongoing South Korean regulatory shifts globally and growing political support for crypto-friendly policies under President Lee Jae-myung, FSS officials insist current rules must be followed until new guidelines emerge.
ETF Portfolios Face Scrutiny
The South Korean crackdown appears triggered by the growing crypto exposure in Korean ETFs, with some funds loading up heavily on digital asset stocks. For instance, the ACE US Stock Bestseller ETF managed by Korea Investment Trust Management holds a whopping 15% allocation in Coinbase alone, while the KoACT US Nasdaq Growth Company Active ETF combines 7% Coinbase and 6% Strategy exposure for a total 13% crypto weighting.
These concerning allocations have caught regulators’ attention as they represent significant departures from traditional investment approaches. The FSS is particularly worried about passive ETFs that mirror set indices, as their structure makes it difficult to manually exclude specific stocks without causing tracking errors and disappointing investors who expect funds to maintain their designated composition.
Industry insiders warn that removing crypto stocks from index-based ETFs could cause “gap rates” to spike, creating costly discrepancies between fund performance and their underlying benchmarks. This technical challenge adds another layer of complexity to an already contentious South Korean regulatory landscape.
Market Players Fight Back
The financial industry isn’t going down without a fight, with critics questioning both the timing and practicality of enforcing seven-year-old rules in today’s evolved crypto market. Industry officials argue that restricting only South Korean ETFs while allowing access to US-based funds with identical crypto holdings creates an ineffective regulatory maze that simply redirects investment flows rather than controlling them.
The disparity has created a two-tier system where sophisticated retail investors can easily circumvent restrictions by purchasing US-listed crypto ETFs, while institutional players face stringent limitations. This regulatory arbitrage undermines the policy’s effectiveness while potentially pushing more investment dollars offshore.
South Korea’s cautious stance dates back to 2017 when officials moved aggressively to curtail corporate crypto trading amid fears of money laundering and market manipulation. However, the digital asset landscape has transformed dramatically over the past seven years, with major institutional adoption and clearer regulatory frameworks emerging globally.
While discussions continue about modernizing crypto regulations and potentially introducing Korean won-backed stablecoins, asset managers must navigate the current restrictive environment until comprehensive policy updates materialize.