South Korea Tightens Grip on Crypto Exposure in ETFs

South Korean authorities are taking steps to curtail the exposure of local asset management companies to crypto investment products and related stocks. This is most likely due to the novel nature of the digital asset industry.

According to a report from local media HeraldCorp, South Korea’s Financial Supervisory Service (FSS) has provided guidance to asset management companies this month. The purpose of the new rules is to reduce the proportion of crypto-related products in local exchange-traded funds (ETFs).

S. Korean ETFs Embrace Crypto Stocks

The FSS found that most South Korean ETFs have allocated more than the recommended 10% of their portfolio to digital asset products. The agency listed this recommendation as part of the emergency measures related to cryptocurrencies in 2017. While almost a decade has passed and the industry has witnessed significant adoption, the FSS insists the rules are still valid.

Both active and passive local ETFs are rapidly incorporating crypto-related stocks. Most of them have included the stocks of the crypto exchange Coinbase and the Bitcoin Treasury firm Strategy in their index funds.

Some of these funds include Korea Investment Trust Management’s ACE US Stock Bestseller ETF and F&Guide’s KoACT US Nasdaq Growth Company Active ETF. The former allocated 14.59% to Coinbase, while the latter holds 13.48% of Coinbase and Strategy. Additionally, the KoACT Global AI & Robot Active ETF holds 10.34% of Coinbase. Timefolio’s TIMFOLIO US Nasdaq 100 Active ETF also allocated roughly 8% to crypto-related stocks.

FSS Encourages Caution

In response to the latest development, the FSS has advised that asset managers do not excessively include crypto-related companies in their portfolios. The agency clarified that this is not a regulation, but an act of caution.

“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 remarked.

As the FSS’s guidance circulates, the local asset management industry insists that it will be difficult to exclude crypto stocks immediately, especially from passive ETFs. This is due to index calculation structures, which need to be updated before any alterations.

Addressing the industry’s concerns, the FSS explained that it is aware that active ETFs can be easily altered, compared to passive funds. However, the guidance aims to encourage caution in the overall design of ETFs until authorities implement new guidelines.

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