South Korea’s Financial Supervisory Service (FSS) has directed local asset managers to reduce holdings in crypto-linked firms across their exchange-traded funds (ETFs). The order specifically targets high allocations in companies like Coinbase (COIN) and MicroStrategy (MSTR), frequently found in domestic ETF portfolios.
FSS Tightens Oversight on Crypto ETF Allocations
The regulator cited concerns over volatility and compliance with its longstanding policies. Despite growing interest in digital assets, the FSS maintains a cautious stance rooted in its 2017 ban on institutional cryptocurrency involvement. That regulation prohibits financial institutions from directly investing in or holding virtual assets.
ETFs with over 10% exposure to crypto-related firms, particularly those listed on U.S. exchanges, are being flagged for review. For instance, ACE US Stock Bestseller ETF currently holds more than 14% in Coinbase. Similarly, KoACT US Nasdaq Growth Company Active ETF allocates over 13% each to both Coinbase and MicroStrategy.
While South Korea plans to ease its crypto ban by 2025, the FSS insists on careful transition. Officials highlighted that investor protection and financial stability remain priorities, even as the global trend shifts toward embracing digital assets.
Rising Crypto Demand Clashes with Regulatory Policy
Crypto adoption continues to rise rapidly among South Korean retail investors. More than 18 million residents actively trade digital assets, and local ETFs increasingly include foreign-listed crypto firms. Yet, regulators remain reluctant to fully integrate such exposure into mainstream financial products.
Critics argue that the policy limits domestic competitiveness. South Korean investors still access U.S.-based crypto ETFs, which remain free from the same local restrictions. This gap has raised concerns about fairness and the viability of passive investing under current FSS rules.
Asset managers also say the directive affects their ability to design diversified, high-performing ETF portfolios. Despite growing investor interest, the FSS remains focused on risk mitigation over innovation.
Crypto ETF Limits Contrast with Broader Policy Shifts
The FSS is being conservative as compared to other government endeavors to support the crypto industry in recent times. Recently, South Korea has suggested the elimination of obstacles to providing tax benefits and government funding to companies operating with digital assets, SMEs, and Startups. Such a step would rank such companies as venture businesses.
At the same time, some of the largest banks are looking at issuing stablecoins. The bank of Korea recently revealed that it will have a consortium, which will issue a stablecoin emission alternating on won by 2026. Banks are already registering trademarks of additional products in this area.
Adding to the momentum, Parataxis Holdings, a crypto-focused treasury firm, recently acquired Bridge Biotherapeutics. The $18.5 million deal signals a strategic move into the South Korean market, further underlining the country’s shifting stance on blockchain finance.
The FSS insists despite these developments. Financial firms are supposed to operate within the available restrictions until strict laws are employed. The regulation highlights the contradiction that the country is facing between nurturing the rise of fintechs and religion regulation.
