South Korea’s Regulatory Stance on Crypto-Linked ETFs
In an effort to maintain financial market stability, South Korea’s financial regulatory body is cautioning fund managers against excessive exposure to cryptocurrency-related stocks within exchange-traded funds (ETFs). The Financial Supervisory Service (FSS) has issued verbal recommendations to fund managers, advising restraint when investing in firms such as Coinbase and Strategy, formerly known as MicroStrategy.
Adherence to Established Guidelines
The FSS emphasizes that the guidelines established in 2017 concerning virtual currencies are still in effect. These guidelines prohibit financial institutions from purchasing, holding, or utilizing digital assets as collateral. Despite a growing interest in cryptocurrencies and indications of regulatory easing in both the United States and South Korea, the FSS notes that no new laws have been officially enacted, making adherence to existing rules imperative.
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ETF Exposure to Crypto Stocks Under Review
The increase in ETFs with significant holdings in crypto-linked stocks has prompted this cautionary stance. Reports indicate that several ETFs have digital asset companies constituting a substantial portion of their portfolios. For instance, the ACE US Stock Bestseller ETF, managed by Korea Investment Trust Management, holds 15% of its assets in Coinbase.
Challenges of Adjusting ETF Portfolios
Most of these are passive ETFs designed to replicate a specific index, posing challenges in removing certain stocks without disrupting the fund’s overall structure. This rigidity can lead to complexities, particularly for investors expecting consistency in the fund’s composition.
Industry Concerns and Practical Implications
The timing and practicality of the FSS’s guidance have sparked some discontent within the industry. An ETF market insider highlighted the difficulty of removing individual stocks without altering the entire index, potentially causing a “gap rate” spike and tracking errors. This concern is compounded by the perception of unfairness, as South Korean investors can still access U.S.-based ETFs with similar crypto holdings, potentially circumventing local restrictions.
Old Regulations, New Challenges
Since 2017, South Korea has maintained a cautious approach towards corporate engagement in cryptocurrencies, initially due to concerns about money laundering and price manipulation amid speculative trading surges. Despite the transformative evolution of the crypto landscape over the years, regulatory frameworks have remained largely unchanged.
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