South Korea's Financial Supervisory Service (FSS) has advised domestic asset managers to scale back exposure to crypto-related stocks within exchange-traded funds (ETFs). The verbal guidance reminds firms that 2017 restrictions on institutional involvement with virtual assets remain in effect.

The warning comes amid a growing trend of adding cryptocurrency exchanges and blockchain firms-often called 'coin theme' stocks-into local ETF portfolios. Some products now hold over 10% in such assets, including companies like Coinbase and Strategy.

The FSS emphasised that despite global shifts toward deregulation, no new laws or formal guidance exist yet in Korea.

ETF providers raised concerns, particularly around passive funds tied to indices. These funds cannot easily alter holdings without creating tracking errors.

The FSS acknowledged this structural challenge, stating that the intent was to encourage caution in future ETF design until a new regulatory framework is in place.

Critics argue the guidance creates inconsistencies, as South Korean investors continue to gain exposure to crypto firms via foreign ETFs. Asset managers now face a compliance dilemma, balancing regulatory caution with investor demand and index constraints.