South Korea Restricts Firms From Including Coinbase, Strategy in ETF Portfolios

The Financial Supervisory Service (FSS), South Korea’s integrated financial regulator, has recommended asset management firms “not to excessively include” crypto stocks like Coinbase and Strategy in their ETFs portfolios.

The regulator has issued verbal guidance to domestic firms, restricting the proportion of crypto companies in ETFs, Herald reported.

The directive indicates that the 2017 administrative guidance related to virtual currencies is still valid and must be followed.

Additionally, the FSS administrative guidance comprises provisions restricting financial institutions from “holding, purchasing, acquiring collateral, and investing in virtual assets.”

“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,” an FSS official noted. “This means that existing guidelines should be followed until the new system is complete.”

South Korea’s Existing Digital Asset Guidelines

Since 2017, Korean regulators have prohibited corporate transactions in virtual assets. The government’s decision at that time was driven by concerns over money laundering, given that corporate trading was seen as posing higher risks compared to individual trading.

On December 13, 2017, the Korean government announced emergency measures in response to the increasingly speculative domestic cryptocurrency market.

Domestic-Listed ETFs Hold Over 10% of ‘Coin Theme’ Stock: FSS

The FSS guidance is interpreted as considering the recent rapid increase in ‘coin theme’ stocks, including coin exchanges and mining companies, being included in ETF markets.

Among domestic listed ETFs, there are many products with a virtual asset-related stock proportion exceeding 10%, the report noted. For instance, the Korea Investment Trust Management’s ‘ACE US Stock Bestseller ETF’ holds Coinbase with a proportion of 14.59%.

Similarly, ‘KoACT US Nasdaq Growth Company Active ETF’ also holds 7.44% of Coinbase, 6.04% of MicroStrategy, adding a total of 13.48% with the relevant stocks.

According to industry insiders, these are passive ETFs that are structured to directly track an index. Besides, it is difficult to exclude passive ETFs.

“If stocks are arbitrarily excluded without changing the index, the gap rate could skyrocket,” one industry insider noted. “I understand the regulatory tone, but it is not easy to respond immediately.”

The local market has also argued that it isn’t fair to apply regulatory standards only to domestic ETFs, as they are already making indirect investments through ETFs of US-listed crypto investment companies.

“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,” another source noted. “It is questionable whether the regulations will be effective in reality.”