South Korea's Financial Supervisory Service (FSS) has issued guidance advising asset managers to limit exposure to cryptocurrencies in exchange-traded funds (ETFs), especially concerning U.S.-listed companies like Coinbase and MicroStrategy.

The timing of this guidance is notable, as it coincides with ongoing efforts to legalize spot crypto ETFs and ease restrictive trading rules, signaling a delicate balance between regulation and innovation in South Korea.

It’s important to note that the guidance is informal and advisory, not a formal regulation, and it indicates that current restrictions remain until new legal frameworks are put in place.

The regulator’s strategy focuses on compliance to ensure financial stability, contrasting with the more progressive regulatory approaches seen in other countries like the U.S.

While the guidance is not legally binding, it carries significant weight due to the FSS’s authority to impose sanctions, encouraging firms to adhere to current rules.

The FSS has not signaled any imminent policy changes, showing a preference for maintaining stability over rapid regulatory shifts.

An FSS official highlighted that, although there is a trend toward deregulation in both the U.S. and Korea, no specific laws or guidelines have been established yet, underscoring the cautious stance.

This advisory reinforces existing regulations from 2017 that prohibit regulated institutions from holding direct or indirect stakes in crypto assets, emphasizing the government's cautious approach despite growing global interest in cryptocurrencies.

This cautious approach reflects ongoing challenges in aligning domestic policies with international standards, especially as global crackdowns on unregulated crypto activities intensify.

Industry insiders note that ETF managers are struggling to comply because passive ETFs must follow external index methodologies, making it difficult to exclude certain stocks without deviating from their investment objectives.

The FSS’s engagement with financial institutions aims to prevent regulatory arbitrage, as firms might seek more lenient environments abroad.

This move comes amid a broader transition in South Korea, where plans to ease the crypto ban by 2025 are underway, but the FSS emphasizes that investor protection and stability remain top priorities.

The FSS’s cautious stance highlights the global trend of prioritizing financial stability during the integration of crypto assets, even as the country gradually moves toward allowing institutional crypto trading.