South Korea Orders Nationwide Halt to Crypto Lending Amid Regulatory Push for Clear Rules

South Korea’s financial oversight body has taken decisive action, ordering a nationwide cessation of crypto lending services offered by digital asset exchanges. This significant move by the Financial Services Commission (FSC) underscores a growing global trend of regulatory bodies addressing the inherent legal ambiguities and escalating risks associated with rapidly expanding crypto financial products, particularly those impacting retail investors.

• The Financial Services Commission (FSC) ordered a nationwide halt to crypto lending.
• This decision addresses legal ambiguities and escalating risks in the digital asset market.
• The directive follows an explosive expansion of exchange-backed lending services.
• Concerns include significant investor losses and potential market instability.
• The FSC aims to establish a clear and comprehensive regulatory framework.

Regulatory Imperative and Market Surge

The FSC formally directed all licensed digital asset platforms to suspend their crypto lending operations until a clear and comprehensive regulatory framework can be established. This directive follows an explosive expansion of exchange-backed lending services, which rapidly attracted tens of thousands of users and substantial capital. Major platforms, including Upbit and Bithumb, had introduced various lending products, enabling clients to borrow against deposits in Korean Won or digital assets such as Tether (USDT), Bitcoin (BTC), and XRP. For instance, Upbit offered loans up to 80% of collateral value, while Bithumb extended up to four times the deposited amount, with other exchanges following suit, framing these offerings as a step towards institutional-grade finance.

Unveiling Market Vulnerabilities and Investor Risks

The swift adoption of these lending services quickly raised alarms among regulators due to observed market vulnerabilities. Data from the FSC revealed that in July alone, approximately 27,600 investors collectively borrowed 1.5 trillion won (equivalent to about $1.1 billion). Critically, sharp market fluctuations during this period led to forced liquidations for roughly 13% of these users, highlighting the substantial potential for significant losses among retail investors. The regulator also noted unusual trading activity connected to these lending operations, including a temporary surge in USDT sell orders that briefly disrupted the stablecoin’s peg. Officials warned that unchecked growth in these products could destabilize both the digital asset markets and the broader financial system.

Path to a Standardized Framework

This recent mandate is not the first instance of regulatory intervention concerning crypto lending in South Korea. The FSC had previously instructed exchanges in late July to reassess the legality of their services, describing them as operating in a “grey zone.” While some platforms, like Upbit and Bithumb, temporarily paused their lending services then, the current order is universal, compelling all platforms to halt operations until legislators finalize comprehensive rules. The regulator’s immediate objective is to leverage this pause to develop standardized guidelines. These guidelines will aim to define eligible assets for collateral and establish robust risk management protocols. This regulatory pause is widely expected to be a central topic in the ongoing parliamentary debates surrounding the proposed Digital Assets Act, which is viewed as South Korea’s initial major legislative effort to fully integrate cryptocurrency activities into its established financial infrastructure.