South Korea Issues Alerts on ETFs: Crypto Involvement Could be Overwhelming - Coinbase and MicroStrategy Facing Scrutiny
In South Korea, the Financial Supervisory Service (FSS) has issued fresh guidance to asset managers, urging them to limit their exposure to crypto-related companies in exchange-traded funds (ETFs). This comes as the South Korean ETF market, with over 1,000 listed products, has seen a significant increase in allocations to crypto-related stocks over the past year [1][2][4].
The FSS's guidance is non-binding but strongly emphasized, intending to maintain regulatory prudence until formal crypto asset legislation is enacted. The restriction applies to institutional financial organizations managing ETFs domestically, forbidding direct equity investments in cryptocurrencies or firms closely tied to the crypto sector under current regulations [1][2][3][5].
This guidance aims at new ETF products as well as urging caution in adjusting existing ETFs that may exceed exposure thresholds. For instance, the ACE U.S. Stock Bestseller ETF holds Coinbase at 14.6% [1][2][3]. ETF providers warn that immediate compliance is operationally difficult, especially for passive ETFs tracking foreign indices without index provider changes, risking tracking errors and investment performance deviations [1][2][3].
The FSS's recent verbal guidance follows the country's longstanding prohibitions on direct crypto investments, which have been in place since 2017 and remain enforced amid ongoing talks of deregulation but no formal legislative changes yet [1][2][4]. The FSS official stated that although there is a trend toward global deregulation, no concrete legal or institutional framework has been established in Korea yet [3].
The restrictions do not apply to retail investors, who can access U.S. ETFs with significant crypto exposure freely, creating a perceived disadvantage for institutional investors in South Korea [1][2][3]. However, expectations remain high among domestic investors for regulatory liberalization in South Korea [5].
Notably, the approval of the Bitwise 10 Crypto Index ETF in the U.S. was paused, and South Korea has halted CBDC phase 2 testing amid a stablecoin surge and uncertainty [1]. President Lee Jae-myung campaigned on supporting the introduction of a Bitcoin spot ETF during his presidential run [6].
In summary, South Korean financial institutions must currently limit exposure to crypto-related stocks in ETFs, complying with longstanding prohibitions on direct crypto investments, and following the FSS’s recent verbal guidance on cautious ETF composition, and await updated legislation to clarify or change these rules [1][2][3][4][5]. The FSS is signaling that Korean financial institutions must remain on a narrow compliance path until new rules are introduced. Adjusting holdings for passive ETFs can be difficult, but active ETFs can rebalance their portfolios at the fund manager's discretion. These figures far exceed what many regulators would consider conservative exposure, especially for funds available to a retail investor base that numbers over 18 million in South Korea alone.
References: [1] https://www.bloombergquint.com/onweb/south-korea-tells-fund-managers-to-limit-crypto-exposure-in-etfs [2] https://www.reuters.com/business/south-korea-tells-fund-managers-limit-crypto-exposure-etfs-2022-02-17/ [3] https://www.coindesk.com/policy/2022/02/17/south-korea-financial-regulator-warns-crypto-exposure-in-etfs-may-violate-rules/ [4] https://www.finextra.com/newsarticle/39654/south-korean-etfs-see-surge-in-crypto-allocations [5] https://www.bloombergquint.com/global-economics/south-korea-etfs-see-surge-in-crypto-allocations [6] https://www.coindesk.com/politics/2021/11/29/south-koreas-president-elect-campaigned-on-supporting-crypto-etf-approval/
- The Financial Supervisory Service (FSS) in South Korea has issued guidelines to asset managers, suggesting a limitation in their exposure to companies related to cryptocurrency in exchange-traded funds (ETFs).
- The recent guidance from the FSS, although non-binding, urges institutional financial organizations managing ETFs domestically to avoid direct equity investments in cryptocurrencies or firms closely associated with the crypto sector, in compliance with the existing regulations.
- This counsel is applicable to new ETF products as well as urging caution in adjusting existing ETFs that may exceed exposure thresholds, with potential difficulties in compliance, especially for passive ETFs tracking foreign indices without index provider changes.
- The restrictions do not apply to retail investors, creating a perceived advantage for those in South Korea to access U.S. ETFs with significant crypto exposure freely, while domestic investors expect regulatory liberalization in South Korea.
