South Korea's Financial Watchdog Tightens Crypto ETF Restrictions

South Korea’s financial regulator has reinforced its restrictive stance on cryptocurrency by rejecting the launch of exchange-traded funds (ETFs) tied to companies involved in digital assets.

Local reports from November 20 revealed that the Financial Supervisory Service (FSS), citing a 2017 government directive, has prohibited asset managers from introducing ETFs focusing on firms like Coinbase.

This decision builds on a broader ban on Bitcoin (BTC) spot and futures ETFs under the South Korean Capital Markets Act, effectively cutting off a critical route for institutional crypto investment.

The FSS decision to block ETFs investing in virtual asset firms has forced domestic asset managers to halt their plans. A representative from one management firm disclosed that efforts to launch a Coinbase-focused ETF are on hold indefinitely.

“We’re ready to launch as soon as we get regulatory approval,” the representative stated.

Other firms have also hesitated to pursue blockchain-focused ETFs due to the lack of clear guidelines and the rejection of similar products, leaving market participants frustrated.

Critics argue that the FSS stance is overly cautious and lacks a solid legal basis. Jung Soo-ho, Managing Partner at Renaissance Law Firm, noted that investments in publicly traded companies like Coinbase do not breach the Capital Markets Act. "While these measures may be intended to protect investors, they essentially function as unwarranted regulatory overreach," Jung added.

An FSS official, however, maintained that loosening these policies is not an option, even as demand for Bitcoin investment grows in South Korea.

Despite the FSS’s firm position, South Korea’s Financial Services Commission (FSC) plans to establish a Virtual Asset Committee to address crypto-related regulations, including the approval of spot crypto ETFs.

Led by FSC Vice Chairman Soyoung Kim, the committee will include members from related government departments and nine private sector representatives to guide the country’s crypto industry. The committee will also focus on approving corporate accounts for crypto investments.

According to Chainalysis, South Korea led Eastern Asia in crypto transaction value between 2023 and 2024, with approximately $130 billion in transactions.

This significant activity is fueled by South Koreans' distrust of traditional financial systems and the involvement of major corporations like Samsung in advancing the crypto sector. Institutions in South Korea also play a critical role in crypto adoption by extensively using decentralized applications.