S. Korea’s FSS Asks ETFs to Cut Coinbase And MicroStrategy Stocks

South Korea’s Financial Supervisory Service (FSS) has directed local asset managers to reduce their exposure to crypto-linked stocks in exchange-traded funds (ETFs), specifically mentioning companies like Coinbase and MicroStrategy. This move reinforces the regulator’s restrictive approach to crypto investments, citing a 2017 policy that prohibits institutional investment in virtual assets.

South Korea Tightens Grip on Crypto Investments

According to the recent Korean Herald report, South Korea’s FSS has cautioned asset managers to rebalance their ETFs and decrease exposure to companies like Coinbase and Strategy. The regulators advised these platforms “not to excessively include” crypto stocks like COIN and MSTR in their portfolios.

Notably, the FSS directive reaffirms the 2017 guidelines on virtual currencies, emphasizing that regulated financial institutions are still prohibited from investing in digital assets. This move seems to contradict previous indications that South Korea’s regulator was exploring ways to ease digital asset trading requirements, instead reinforcing strict rules on crypto investments.

Further, the FSS guidelines prohibit financial institutions from holding, buying, or investing in virtual assets, as well as acquiring them as collateral. An official stated,

Recently, there has been a trend of deregulation related to virtual assets in the U.S. and Korea, but there have been no specific laws or guidelines established yet. This means that existing guidelines should be followed until the new system is complete.

Reportedly, South Korea has been exhibiting a positive shift, transitioning away from its informal ban on institutional crypto trading. Especially following the election of pro-crypto President Lee Jae-myun, the country has accelerated its efforts to revamp its crypto regulations. As CoinGape reported earlier, South Korea announced plans to recognize crypto firms as venture companies, offering access to government support, tax benefits, and financial incentives.

Regulatory Concerns Over Crypto-Themed Stocks

South Korea’s ETF market has achieved a remarkable milestone with over 1,000 funds listed, yet the Financial Supervisory Service (FSS) has introduced guidance that appears to target the growing presence of cryptocurrency-related stocks in ETFs.

This development is particularly noteworthy, given South Korea’s substantial crypto market, which boasts 18.25 million investors and is known for its active retail trading. The FSS’s move may reflect concerns about the rapid growth of ‘coin-themed’ stocks, including those of crypto exchanges and mining companies, and their potential impact on the ETF market.

Reportedly, many domestic ETFs have significant exposure to virtual asset-related stocks, with some exceeding 10% allocation. For example, the ACE US Stock Bestseller ETF holds 14.59% in Coinbase. Similarly, the KoACT US Nasdaq Growth Company Active ETF has a 7.44% stake in Coinbase and a 6.04% stake in Strategy.

Industry Pushes Back on Regulations

The crypto space remains anxious about the stringent crypto regulations, as they may hinder the country’s progress in the digital asset market. It is noteworthy that the country’s cautious approach comes on the heels of progressive developments.  For instance, Parataxis Holdings announced plans to launch South Korea’s first Bitcoin Treasury company by acquiring a majority stake in biotech firm Bridge Biotherapeutics for $18.5 million.

Industry insiders point out that passive ETFs, which aim to replicate an index, cannot easily exclude certain stocks without deviating from their investment objective. Domestic market players also contend that it is unfair to impose regulatory standards only on local ETFs, as they are already indirectly investing in crypto through US-listed ETFs.

They said, “Restricting only domestic ETFs will not stop the flow of funds, and in reality, many investors are already bypassing the market with U.S. ETFs. It is questionable whether the regulations will be effective in reality.”