South Korean Regulator Urges Asset Supervisors to Limit Crypto Exposure
Recently, South Korea’s Financial Supervisory Service (FSS) advised local asset management firms to adjust their exchange-traded funds (ETFs) to reduce exposure to digital asset-related companies like Coinbase and MicroStrategy. The FSS verbally recommended against increasing the proportion of virtual asset-related companies in listed index funds (ETFs) to caution asset managers about the risks associated with heavy exposure to digital assets.
The Regulatory Guidance
The FSS acknowledged the challenges of passive ETFs in excluding specific stocks without approval from index providers. Although the guidance was not issued as a strict mandate due to these structural constraints, it serves as a reminder for asset managers to be cautious in developing ETF products until the system can be restructured.
However, the guidance has not been universally welcomed within the industry. Some insiders have questioned the fairness of imposing regulatory requirements solely on domestic ETFs, especially when local investors are already utilizing U.S.-based ETFs for exposure to virtual asset companies.
South Korea’s Regulatory Landscape
This directive from the FSS aligns with the increasing interest in South Korean ETF allocations toward digital assets amid a trend of deregulation surrounding virtual assets in the U.S. and Korea. This has prompted the regulator to emphasize adherence to the existing 2017 emergency administrative guidance related to virtual currencies.
In December 2017, emergency measures advised institutional financial entities against holding, acquiring, or investing in virtual assets. While these guidelines are not legally binding, the Financial Services Commission (FSC) directed domestic banks to refrain from offering services to non-compliant exchanges, indirectly promoting compliance with the directives.
The Road Ahead: Digital Asset Basic Act (DABA)
The FSS reiterated the importance of abiding by the current regulations until the enforcement of the Digital Asset Basic Act (DABA). Introduced in June by South Korea’s Democratic Party, the DABA aims to establish a comprehensive legislative framework for digital assets, encompassing regulations on stablecoin reserves, capital requirements for stablecoin companies, and guidelines on digital asset issuance and distribution.
This legislation seeks to clearly define digital assets, introduce tailored regulatory provisions, and address specific industry sector needs. This regulatory push reflects South Korea’s commitment to enhancing oversight and promoting responsible digital asset practices.
Expert Commentary
According to Sam Boolman, ChainIntel’s lead analyst, ‘The FSS’s guidance underscores the regulatory complexities in balancing investor interests with risk management in the evolving digital asset landscape. Asset managers must navigate these challenges to ensure compliance while pursuing optimal investment strategies.’
