South Korea FSS pushes for asset managers to limit crypto ETF exposure

The Financial Supervisory Service (FSS) of South Korea has given new orders to local asset managers to limit their exposure to crypto-related firms in their exchange-traded funds (ETFs). The directive refers to larger U.S. crypto companies, such as Coinbase (COIN) and Strategy (MSTR), which are prominently included in several local ETF portfolios.

The asset managers have been advised not to place much emphasis on crypto-themed stocks in ETF structure based on some of the guidelines that have been reviewed by local firms. Others, including Korea Investment Management ACE US Stock Bestseller ETF, already hold more than 14% in Coinbase. The KoACT US Nasdaq Growth Company Active ETF includes 13.4% of Coinbase and 13.4% of Strategy.

Although the retail phenomenon of crypto investments is increasingly popular in South Korea, the FSS has doubled down on its 2017 position, which prohibits direct holdings, investments, or use of cryptocurrencies as collateral by financial organizations.

An FSS official reiterated that although the global opinion would seem to be trending towards the use of digital assets, South Korea needs to follow the currently available guidelines until a wider legal framework is adopted. The announcement was made amid increased tension between regulatory conservatism and the rapidly growing crypto sector in the country.

Crypto demand grows as regulators hold back

The FSS crackdown comes after South Korea registered a rise in crypto-related investments. More than 18 million citizens trade cryptocurrencies, and several ETFs have become more heavily weighted with digital asset companies listed overseas. Such trends expose the gap between investor demands and regulatory policy.

The South Korean ETF market now includes more than 1,000 listed products, whereas the FSS is still worried about the risk of overexposure to crypto stocks. The agency advice identifies ETFs that allocate over 10% of their funds in firms dealing with virtual assets, especially those that use U.S. listings.

Market players say that focusing on domestic ETFs is not a level playing field. Investors can still indirectly get exposure to crypto through the U.S.-based ETFs, free from similar restrictions. Some critics argue that local money is being unfairly restricted, hitting competitiveness and damaging passive investment techniques.

Conflicting signals as government pursues crypto-friendly measures

The FSS directive is opposed to the recent events that seemed promising to the crypto world. The Ministry of SMEs and Startups of South Korea recently suggested lifting controls that did not allow crypto firms to obtain tax incentives and governmental funding. The initiative will identify digital asset companies as venture enterprises.

Regulatory interest also shifted to stablecoins, with many South Korean banks in exploratory mode. Others registered trademarks on potential stablecoin products, with the Bank of Korea revealing plans for a consortium of banks to issue a won-pegged stablecoin by 2026.

In addition, Parataxis Holdings recently announced that it has established a presence in South Korea and is the first Bitcoin treasury company through its acquisition of biotech company Bridge Biotherapeutics. The $18.5 million purchase is a sign of change with regard to crypto-native treasury management practices.

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