South Korea Tightens Crypto ETF Restrictions for Domestic Asset Management Firms

Highlights:

• South Korea has tightened restrictions on crypto ETFs by asking asset managers to lower crypto stock exposure.
• Firms say the ETF structure makes it hard to cut crypto stocks without causing major index tracking issues.
• The regulatory body noted that the current restrictions on crypto ETFs will remain until lawmakers introduce new rules.

The Financial Supervisory Service has instructed local asset management firms to reduce the portion of crypto-related stocks in their ETF portfolios. The guidance focuses on companies like Coinbase and MicroStrategy, which have seen increased inclusion in several domestic funds.

🚨 South Korea Orders Asset Managers to Cut Crypto ETF Exposure to Coinbase, Strategy

The Financial Supervisory Service (FSS) of South Korea has verbally directed domestic asset management firms to reduce their holdings in exchange-traded funds (ETFs) linked to crypto-related… pic.twitter.com/Wnlaj7A76W

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The FSS reminded firms that earlier administrative rules from 2017 still apply. Those rules prohibit financial institutions from holding, purchasing, acquiring as collateral, or investing in virtual assets. An official from the FSS explained that, although both South Korea and the United States are moving toward relaxed rules on digital assets, no formal laws exist yet. Therefore, asset managers must continue to follow the existing instructions until a new framework becomes available.

The 2017 directive was introduced after concerns rose about excessive speculation and the risk of money laundering in crypto markets. At that time, the government restricted corporate trading in virtual assets because it viewed institutional involvement as riskier than individual participation. Meanwhile, the country elected a pro-crypto president who promised to introduce crypto ETFs and a won-backed stablecoin.

The FSS responded to a growing trend of domestic ETFs investing heavily in crypto-linked firms. Officials highlighted the increasing presence of coin-themed stocks, such as mining operations and exchanges, in ETF portfolios. The agency warned that firms should avoid allocating excessive weight to these assets. It made clear that current market activity must not ignore long-standing rules.

Industry Pushback Emerges Amid South Korea Crypto ETF Restrictions

The decision has triggered opposition from industry players, especially managers handling ETFs with high exposure to digital asset firms. Some domestic ETFs already exceed a 10% share of crypto-related holdings. For example, the ACE US Stock Bestseller ETF from Korea Investment Trust Management includes Coinbase at 14.59%.

These investments track index-based strategies, and it is not easy to exclude these indexes without modifying the entire index. The asset managers are aware of the concerns of the FSS but are also subject to structural constraints. Adjusting these ETFs may affect their purpose and cause imbalance in fund performance.

They also argue that banning only domestic funds is unfair to the industry. South Korean investors already access crypto asset exposure via the U.S.-listed ETFs. Due to this, several companies feel that the new direction will not entirely prevent the inflow of funds to the industry. They demand that without wider coordination, the limits can leave open gaps rather than provide effective control.

FSS Maintains Old Guidelines Until Legal Updates Are Finalized

The Financial Supervisory Service clarified that its previous policies will continue until new legislation is put in place. Despite the government debating lifting restrictions on virtual asset investments, the legal procedure has not been finalized yet. Discussions continue about launching local crypto ETFs and expanding stablecoin use backed by the Korean won.

Until new rules come into effect, financial institutions must follow the 2017 directive. The FSS stated that existing guidance will stay in place as the country works on updated measures. Institutions must operate under the current rules until the government finalizes a legal framework.