TLDR
- South Korea’s Financial Supervisory Service instructed ETFs to reduce exposure to crypto-related stocks.
- The directive targets holdings in companies such as Coinbase and MicroStrategy.
- The move reinforces South Korea’s 2017 policy that bans institutional investment in virtual assets.
- ETFs with more than 10 percent exposure to crypto stocks must rebalance their portfolios.
- The FSS stated that existing rules must be followed until new regulations are introduced.
South Korea’s Financial Supervisory Service has instructed local asset managers to reduce crypto stock exposure in exchange-traded funds. The directive targets U.S.-listed crypto firms like Coinbase and MicroStrategy. The move aligns with a 2017 policy prohibiting institutional investment in virtual assets.
South Korea tightens ETF crypto exposure
The Financial Supervisory Service (FSS) in South Korea directed asset managers to rebalance ETF portfolios holding crypto-linked stocks. The regulator highlighted concerns about the high allocation to companies such as Coinbase and MicroStrategy and emphasized compliance with its 2017 stance on virtual asset restrictions.
The policy prohibits financial institutions from directly or indirectly investing in digital assets or accepting them as collateral. Therefore, the FSS stated that asset managers must not exceed certain levels of exposure to crypto-related equities. Despite earlier signs of regulatory flexibility, the current decision confirms a stricter investment environment.
South Korea has experienced rapid ETF growth, with over 1,000 funds listed. However, the FSS remains focused on maintaining control over virtual asset-linked products. The new directive reflects a broader strategy to limit the influence of digital assets in traditional financial products.
Coinbase Holdings in ETFs Raise Regulatory Flags
Coinbase stocks have become a significant component in several South Korea-listed ETFs. For example, the ACE US Stock Bestseller ETF currently holds more than 14% in Coinbase shares. Another fund, the KoACT US Nasdaq Growth Company Active ETF, has a 7.44% allocation to Coinbase.
The FSS considers this level of exposure inconsistent with existing regulations restricting institutional involvement in virtual assets. It noted that ETF managers must adjust portfolios to align with investment rules, despite the classification of these stocks as part of broader U.S. indices.
South Korea’s regulators have argued that allowing excessive holdings in crypto-related companies may blur the boundary between permitted equity investments and restricted assets. As a result, the directive aims to ensure ETFs do not indirectly promote crypto investment. Local asset managers must follow the guidance without disrupting the ETF market structure.
MicroStrategy Exposure Triggers FSS Oversight
MicroStrategy stock holdings in domestic ETFs have also drawn scrutiny from South Korea’s FSS. Several actively managed ETFs include substantial exposure to the software firm due to its large Bitcoin reserves. The regulator insists that this indirectly violates the institutional ban on crypto assets.
While MicroStrategy is a technology company, its investment model is closely tied to Bitcoin performance. The FSS directive treats such exposure as inconsistent with existing financial rules, further strengthening the watchdog’s intent to separate traditional investment products from crypto-linked risks.
South Korea continues to see high retail interest in cryptocurrencies, but institutional participation remains restricted. Though the government has introduced supportive measures for blockchain firms, direct crypto investment by institutions remains off-limits.
