South Korea’s financial regulator has moved to rein in risky lending practices in the digital asset sector, ordering local exchanges to suspend all crypto lending services until a proper regulatory framework is established.
Key Takeaways:
FSC halts crypto lending as South Korean exchanges must suspend services until formal rules are introduced. Investor risks exposed with 27,600 users borrowing $1.1B and 13% forced into liquidation in one month. Guidelines coming soon as regulators promise a rulebook to protect users and stabilize the market.The Financial Services Commission (FSC) confirmed on Tuesday that it issued administrative guidance to exchanges, instructing them to halt operations that allow users to borrow against cryptocurrencies or fiat deposits.
The order takes effect immediately and will remain in place until new lending rules are finalized.
Rapid Growth, Rising Risks
Crypto lending services had surged in popularity since early July. Upbit introduced a program enabling users to borrow up to 80% of the value of their deposits in Korean won or digital assets, using Tether (USDT), Bitcoin, and XRP as collateral.
Rival Bithumb rolled out a similar product, offering loans worth up to four times the value of a customer’s holdings. Other local platforms quickly followed.
The launches coincided with the ruling party’s proposal of the Digital Asset Basic Act, which seeks to formally authorize lending services within exchange operations.
However, the FSC warned last month that the products operated in a regulatory gray zone and posed significant risks.
In its latest release, the regulator disclosed that roughly 27,600 investors borrowed 1.5 trillion won ($1.1 billion) in the first month of one company’s lending program.
About 13% of borrowers were forced into liquidation due to market volatility, the FSC said. It also highlighted an unusual sell-off in USDT triggered by the lending services, which temporarily disrupted stablecoin pricing on Korean platforms.
The FSC stressed that it intends to create a clear rulebook for digital asset lending.
“We will move swiftly to prepare guidelines to protect users and ensure stability in the market,” the agency said, adding that existing loans can still be repaid or extended under current contracts.
Exchanges that fail to comply with the suspension order face on-site inspections. Both Upbit and Bithumb had already paused lending once in July, though Bithumb resumed operations under stricter terms before the new suspension.
South Korea Eases Crypto Curbs, Paves Way for First Spot ETFs
The crackdown comes amid South Korea’s broader pivot toward regulated crypto adoption. Authorities are lifting restrictions on institutional trading and preparing to approve the country’s first spot crypto ETFs.
President Lee Jae Myung’s administration is also working on a stablecoin framework pegged to the Korean won, signaling a more open approach to digital finance despite the latest curbs.
Last week, Dunamu, the operator of South Korea’s largest cryptocurrency exchange Upbit, unveiled a new custody service aimed at corporate and institutional clients, as regulatory green lights for virtual asset investments spark growing demand for secure storage solutions.
The service stores all deposited digital assets in cold wallets, entirely offline and insulated from internet-based threats, to shield holdings from cyberattacks and other external breaches.
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