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South Korea’s Financial Supervisory Service (FSS) has issued informal guidance urging asset managers to limit their exposure to crypto-linked stocks such as Coinbase and MicroStrategy within ETFs, reinforcing a 2017 policy that restricts institutional investment in virtual assets.
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This advisory emerges amid South Korea’s gradual regulatory shift toward permitting institutional crypto trading, highlighting tensions between legacy restrictions and evolving market dynamics.
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According to COINOTAG, the FSS’s directive aims to curb excessive concentration in crypto-related equities, signaling cautious oversight despite ongoing reforms.
South Korea’s FSS advises asset managers to reduce crypto-linked ETF holdings, reaffirming 2017 restrictions as the country phases in institutional crypto trading reforms.
FSS Reinforces 2017 Crypto Investment Restrictions Amid Growing ETF Exposure
The Financial Supervisory Service’s recent informal guidance reflects a proactive stance to ensure compliance with existing regulations while South Korea navigates its evolving crypto policy landscape. The 2017 administrative notice explicitly prohibits regulated financial institutions from holding or investing in virtual assets or companies primarily engaged in crypto activities. This directive was prompted by a surge in domestic ETFs allocating significant portions of their portfolios to crypto-linked stocks such as Coinbase and MicroStrategy, raising concerns about potential overexposure.
For instance, Korea Investment Management’s ‘ACE U.S. Bestseller ETF’ reportedly holds over 14% in Coinbase shares, illustrating the scale of crypto-related exposure within local funds. While the FSS acknowledges the structural challenges passive ETFs face in excluding specific stocks without index adjustments, it encourages asset managers to exercise prudence in product design to mitigate regulatory risks.
Balancing Regulatory Caution with Market Evolution
Despite the FSS’s reaffirmation of the 2017 policy, South Korea is concurrently advancing regulatory reforms to integrate crypto assets more fully into its financial ecosystem. Recent policy shifts include permitting nonprofit entities to liquidate donated crypto assets and plans to extend similar permissions to public companies and professional investors by mid-2025. This phased approach underscores the government’s intent to balance investor protection with innovation, ensuring that institutional participation in crypto markets occurs within a controlled and transparent framework.
South Korea’s Evolving Position on Crypto ETFs and Institutional Participation
Historically, South Korea has maintained a conservative stance on crypto ETFs, restricting local firms from offering these products despite retail investors’ access to foreign crypto-linked ETFs. However, the regulatory environment is shifting in response to global trends and domestic political support. The Financial Services Commission recently submitted a digital asset roadmap proposing the legalization of spot crypto ETFs within the year, signaling a significant policy pivot.
Political momentum is further bolstered by both the People Power Party and the ruling Democratic Party, which advocate for dismantling restrictive measures such as the “One Exchange, One Bank” rule. This bipartisan support aligns with President Lee Jae-myung’s campaign promises to legalize spot Bitcoin ETFs and expand institutional crypto market participation, reflecting a broader strategy to attract younger investors and foster a competitive digital asset sector.
Implications for Investors and Asset Managers
The FSS’s guidance serves as a critical reminder for asset managers to reassess their crypto-linked holdings within ETFs, ensuring alignment with current regulatory expectations. Investors should remain vigilant about the composition of their portfolios, particularly regarding exposure to crypto-related equities that may be subject to regulatory scrutiny. As South Korea’s crypto regulatory framework matures, market participants can anticipate clearer guidelines and potentially expanded opportunities for institutional involvement.
Conclusion
South Korea’s Financial Supervisory Service has underscored the importance of adhering to longstanding restrictions on institutional investment in virtual assets, even as the country embarks on a gradual liberalization of crypto market regulations. This dual approach highlights the government’s commitment to safeguarding financial stability while fostering innovation. Asset managers and investors alike should monitor regulatory developments closely to navigate this transitional period effectively and capitalize on emerging opportunities within South Korea’s evolving crypto landscape.
