In a recent move, South Korea’s financial regulatory authority has expressed concerns regarding the extent of cryptocurrency-related investments within exchange-traded funds (ETFs).
The Financial Supervisory Service (FSS) has communicated its recommendations, advising investment firms to limit their exposure to crypto-centric companies such as Coinbase and Strategy (previously known as MicroStrategy).
This guidance reinforces an earlier directive from 2017 that remains in effect, which prohibits financial entities from purchasing, holding, or securing loans with digital currencies as collateral.
Despite a rising interest in cryptocurrency and the potential for less stringent regulations in both the US and South Korea, officials have emphasized that no new laws have been enacted. Thus, existing regulations continue to apply.
Increased Oversight on ETF Crypto Holdings
A primary reason behind this notification is the noticeable surge in ETFs that are significantly investing in crypto-associated stocks.
Reports indicate that numerous ETFs include digital asset firms as essential components of their portfolios, sometimes constituting over 10% of their total assets.
For instance, the ACE US Stock Bestseller ETF, managed by Korea Investment Trust Management, allocates a notable 15% solely to Coinbase.
Additionally, the KoACT US Nasdaq Growth Company Active ETF contains 7% of Coinbase and 6% of Strategy, summing up to a 13% investment in crypto-linked stocks.
These funds predominantly operate as passive ETFs, aiming to replicate a designated index, complicating the removal of particular stocks without disrupting the expectations of investors regarding fund structure.
Industry Concerns and Practical Implications
Reactions within the industry reflect dissatisfaction regarding the timing and feasibility of the FSS advisory. An insider familiar with the ETF landscape noted that excluding specific stocks from index-based ETFs could lead to a phenomenon known as “gap rate,” exacerbating tracking errors.
Questions of equity have also been raised. Critics argue that imposing limitations solely on domestic ETFs may be illogical since South Korean investors have easy access to US ETFs that include identical crypto stocks. Consequently, funds may simply shift away from local regulations rather than adhering to them.
“Significant indirect investment is already occurring through US ETFs,” remarked one industry professional. “Restricting only Korean ETFs won’t genuinely disrupt the trend.”
Old Regulations, Evolving Concerns
Since 2017, South Korea has exercised caution regarding corporate participation in the cryptocurrency sector, particularly following heightened speculative activities.
At that time, the primary fears revolved around issues such as money laundering and potential market manipulation. However, nearly seven years later, the cryptocurrency landscape has transformed significantly, while regulatory frameworks have remained largely unchanged.
Featured image from Unsplash, chart from TradingView
