South Korea FSS Advises Asset Managers on Crypto Company Exposure

South Korea’s digital asset regulatory landscape is currently undergoing a significant reassessment, as the nation’s primary financial watchdog recently advised asset management firms to reduce their exposure to companies with substantial investments in cryptocurrencies. This directive from the Financial Supervisory Service (FSS) signals a carefully considered approach to risk management within a rapidly evolving sector, highlighting the inherent tension between established financial regulations and the growing institutional interest in the crypto economy.

• In early July 2025, the Financial Supervisory Service (FSS) issued an advisory to asset managers.
• The FSS recommended that fund managers, particularly those overseeing exchange-traded funds (ETFs), refrain from increasing their holdings in companies heavily invested in cryptocurrency, such as Coinbase and Strategy (formerly MicroStrategy).
• This guidance aligns with South Korea’s existing 2017 regulations, which explicitly prohibit regulated institutional financial entities from directly holding cryptocurrencies or their derivatives.
• While the FSS clarified its guidance was advisory rather than mandatory, it underscores the regulator’s cautionary stance on current compliance.
• Many South Korean ETFs, including Korea Investment Trust Management’s ACE US Equity Best Seller ETF, already hold significant stakes in U.S.-based crypto firms (e.g., 14.6% in Coinbase shares).
• The FSS’s proactive stance is a prelude to anticipated shifts in South Korea’s regulatory framework, partly influenced by the pro-cryptocurrency stance of presidential candidate Lee Jae-myung.

The FSS Directive and Existing Framework

In an advisory issued in early July 2025, the FSS specifically recommended that asset managers, particularly those overseeing exchange-traded funds (ETFs), avoid increasing their holdings in companies like Coinbase and Strategy (formerly MicroStrategy). This recommendation is firmly rooted in South Korea’s existing 2017 regulations, which explicitly prohibit regulated institutional financial entities from holding cryptocurrencies or their derivatives on their balance sheets. While the FSS clarified that this guidance was advisory rather than mandatory, it nonetheless underscores the regulator’s firm stance on current compliance and risk mitigation within the financial system.

Market Response and Portfolio Implications

The FSS’s proactive stance has ignited significant discussions among ETF providers, especially given that current rules do not extend to retail investors, thereby creating a notable disparity in regulatory oversight. Many South Korean ETFs have already made substantial investments in U.S.-based crypto firms, posing a practical challenge for adherence to the FSS’s advice. For instance, the ACE US Equity Best Seller ETF, managed by Korea Investment Trust Management, holds a notable 14.6% stake in Coinbase shares. This existing exposure highlights the inherent difficulties for fund managers in adhering to the FSS’s cautionary advice without significantly disrupting their current portfolios, particularly those designed for passive investment strategies.

Anticipating Future Regulatory Shifts

Acknowledging the complexities of implementing such changes, particularly within passive investment vehicles, the FSS stated its primary objective is to “encourage caution” when launching new financial products. This proactive guidance is widely perceived as a prelude to anticipated shifts in South Korea’s broader regulatory framework for digital assets. Investors are closely monitoring for these forthcoming changes, which are broadly expected to materialize in the near future. This regulatory evolution is partly spurred by the political landscape, including the election of Lee Jae-myung, a presidential candidate known for his publicly expressed pro-cryptocurrency stance, signaling a potential softening or redefinition of existing restrictions.