ETF Alert! South Korean Regulator Bars Coinbase, Strategy Assets In One Sweeping Move

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South Korea’s financial watchdog is urging fund managers to scale back on how much crypto-related stock they pack into exchange-traded funds (ETFs).

The Financial Supervisory Service (FSS) has reportedly issued verbal guidance advising firms not to go overboard with investments in companies like Coinbase and Strategy (formerly MicroStrategy).

The FSS pointed out that the 2017 guidance on virtual currencies remains active and should still be followed. That older directive bars financial institutions from buying, holding, or using digital assets as collateral.

Despite growing interest in crypto and signs of lighter regulation in both the US and South Korea, officials say nothing new has been put into law yet. So for now, old rules still apply.

ETF Exposure To Crypto Stocks Draws Scrutiny

One big reason for the warning seems to be the rising number of ETFs that now hold large amounts of crypto-linked stocks.

According to reports, many of these ETFs list digital asset companies as a key part of their portfolio—sometimes making up more than 10% of the total.

Image: Markets.com

For example, the ACE US Stock Bestseller ETF, managed by Korea Investment Trust Management, has a 15% allocation in Coinbase alone.

Another fund, the KoACT US Nasdaq Growth Company Active ETF, holds 7% of Coinbase and 6% of Strategy, totaling 13% in crypto-related stocks.

These funds are mostly passive ETFs, which are designed to mirror a set index. That makes it hard to manually remove specific stocks without causing problems for investors who expect the fund to stick to its structure.

Market Pushback And Practical Challenges

Some in the industry aren’t happy about the timing or practicality of the FSS guidance. One official with knowledge of the ETF space said that removing specific stocks from index-based ETFs without altering the whole index could cause what’s known as a “gap rate” to spike, leading to tracking errors.

Another concern is fairness. Critics say it doesn’t make sense to limit only local ETFs when South Korean investors can easily access US-based ETFs that hold the same crypto stocks. In that case, the money just flows around the restriction instead of through it.

“There’s already a lot of indirect investment happening through US ETFs,” one source said. “Putting restrictions only on Korean ETFs won’t really stop the trend.”

Old Rules, New Problems

South Korea has been cautious about corporate involvement in crypto since 2017, when officials moved to shut down company-level trading in response to a spike in speculative activity.

Back then, the fear was mainly about money laundering and price manipulation. But nearly seven years later, the crypto world has changed dramatically—even if the rules haven’t.

Featured image from Unsplash, chart from TradingView

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