South Korea’s FSS Urges Asset Managers to Limit Crypto Exposure in ETFs

FSS Issues Advisory on Crypto Stock Exposure

South Korea’s Financial Supervisory Service (FSS) has advised local asset managers to avoid excessive exposure to crypto-related companies, including Coinbase and Strategy stocks, as regulatory clarity on digital assets is still developing.

The guidance, reported by The Korea Herald on Wednesday, is informal and advisory, rather than an enforceable mandate.

ETF Tracking Challenges

The advisory has limited immediate impact since passive exchange-traded funds (ETFs) that track a benchmark index cannot easily exclude specific stocks without approval from index providers.

“Since we track the index directly, removing a stock without an index change could result in large tracking errors. We understand the regulatory stance but cannot respond immediately,”

— Anonymous fund manager, The Korea Herald.

Industry Pushback and Global Exposure

Industry participants argue that restricting domestic ETFs won’t stop capital flows into crypto. Investors can already gain exposure to crypto-related companies through U.S.-listed ETFs, making unilateral restrictions on South Korean funds potentially ineffective.

“Restricting domestic ETFs won’t stop capital flows. Investors are already going around these rules via U.S. products. It’s questionable whether such regulation is even effective,”

— Anonymous industry source.

Growing Allocation to Crypto Stocks

Despite regulatory caution, crypto-related stocks remain popular among South Korean ETFs.

• Korea Investment Management’s Ace US Stock Bestseller ETF holds Coinbase at 14.6%.

• KoACT Nasdaq Growth Active ETF holds Coinbase (7.4%) and Strategy (6%), totaling 13.4%.

• KoACT Global AI & Robotics Active ETF allocates 10.3% to Coinbase.

• Timefolio Nasdaq 100 Active ETF provides an 11% exposure to crypto-related equities.

Financial Supervisory Service headquarters. Source: WikiMedia

Related: South Korean Bank Stocks Surge Amid Stablecoin Trademark Frenzy

Regulatory Landscape in Transition

The FSS emphasized that local financial institutions are still barred from directly holding, acquiring, or using cryptocurrencies as collateral.

“Although both U.S. and Korean regulators are showing signs of easing crypto rules, no concrete laws or guidelines have been implemented. Until new frameworks are in place, existing rules must be followed,”

— FSS official.

Shifts Toward Crypto-Friendly Policies

The advisory comes amid signs of regulatory openness in South Korea:

• The Ministry of SMEs and Startups recently proposed lifting restrictions preventing crypto firms from receiving tax breaks and financial support.

• Major Korean banks have filed stablecoin-related trademarks, reflecting institutional interest in digital assets.

• The Bank of Korea is delaying central bank digital currency (CBDC) testing while supporting the growth of stablecoins.

• Deputy Governor Ryoo Sangdai stated in June that banks could become primary issuers of stablecoins, with a nationwide Korean won-pegged stablecoin expected by 2026.

Related: South Korea Tightens Crypto Regulations Ahead of Institutional Market Entry