South Korea’s FSS Urges Caution on Crypto Exposure in ETF Portfolios

South Korea’s Financial Supervisory Service (FSS) has warned the country’s domestic asset management firms to limit crypto exposure in their Exchange-Traded Fund ETF portfolios. The FSS has asked the firms to limit the inclusion of crypto-related stocks such as MicroStrategy and Coinbase.

According to the report shared by The Korea Herald, the Financial Supervisory Service has provided verbal guidance to the firms to discourage them from allocating excessive weight to so-called “coin theme” stocks in ETF products. This move signals South Korea’s ongoing struggle and caution toward digital assets, despite recent signs of regulatory relaxation both domestically and abroad.

South Korea Warns Firms Against Crypto Exposure

The FSS reaffirmed that the 2017 administrative guidance concerning virtual currencies remains in effect. This directive prohibits financial institutions from directly engaging in crypto asset transactions, including holding, purchasing, or using virtual currencies as collateral.

“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,” an FSS official noted.

The renewed attention from regulators comes amid a spike in ETFs containing significant allocations to crypto-related companies. For example, Korea Investment Trust Management’s ‘ACE US Stock Bestseller ETF’ allocates 14.59% to Coinbase. Similarly, the ‘KoACT US Nasdaq Growth Company Active ETF’ holds 7.44% in Coinbase and 6.04% in MicroStrategy, totaling nearly 13.5% in crypto-exposed firms.

Important Reads: South Korea Launches Centralized Crypto Policy in Major Regulatory Overhaul

These holdings, while technically indirect, still represent significant exposure to the volatile digital asset sector, prompting the FSS’s concern.

Industry insiders argue that many of these ETFs are passively managed and designed to track established directories, making it difficult to exclude crypto-related stocks without disrupting the index structure. “If stocks are arbitrarily excluded without changing the index, the gap rate could skyrocket. I understand the regulatory tone, but it is not easy to respond immediately,” one industry insider noted.

Critics of the FSS’s stance say the guidance unfairly targets domestic ETFs while allowing indirect exposure through U.S.-listed funds. “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,” another source noted.

Despite the lack of binding legal action, the FSS’s directive highlights the tension between market innovation and regulatory caution in South Korea’s evolving approach to digital asset investment. As lawmakers continue to debate formal crypto legislation, current guidelines remain the primary benchmark for institutional behavior.