"In some instances, citizenship cessation will curtail the range of threat mitigation capabilities available to Australian authorities," the intelligence agency said in a submission to a Senate committee investigating the legislation.
"It may also have unintended or unforeseen adverse security outcomes - potentially including reducing one manifestation of the terrorist threat while exacerbating another."
While stranding these people offshore meant they couldn't physically attack Australia or do any face-to-face recruitment, it limited the ability of security agencies to monitor them.
ASIO said the way the law now operates - where people automatically lose their citizenship merely by joining the conflict - doesn't give security agencies any flexibility.
There could be cases where it was preferable for the person to keep their Australian citizenship, such as if the Australian Federal Police had criminal charges they wanted to pursue.
It supported a model where the minister decided each case individually, "including having regard to whether ceasing an individual's Australian citizenship would reduce the threat and protect Australia and its interests from that harm".
The ASIO submission confirmed authorities believe 230 Australians have travelled to join the Syria-Iraq conflict.
About half have been killed, 80 are still over there, and 40 have returned to Australia but mostly before the laws started operating in 2016.
While the government says 12 people have been stripped of their citizenship under the laws, Home Affairs officials told a committee hearing in August the automatic nature of the provisions meant they couldn't be sure if there were more.
National security experts told the same hearing there was no evidence the threat of stripping people's citizenship deters them from becoming a terrorist and it could actually be counterproductive.