TLDR
- South Korea’s Financial Services Commission has ordered all domestic crypto exchanges to suspend lending services immediately.
- The suspension follows concerns over legal uncertainties and significant investor risks associated with crypto-backed loans.
- The move comes after a surge in high-risk lending products, particularly from Upbit and Bithumb.
- In one month, 27,600 investors borrowed 1.5 trillion won through crypto lending services, with 13% facing forced liquidation.
- The FSC emphasized that the lack of legal clarity around these products could lead to market disruptions.
South Korea’s Financial Services Commission (FSC) has ordered all domestic crypto exchanges to suspend crypto lending services immediately. The move, effective Tuesday, follows rising legal concerns and growing investor risks tied to recent lending products. The FSC confirmed the suspension applies to all platforms until formal regulations are introduced.
Upbit’s Leveraged Lending Sparks Regulatory Action
South Korea’s largest exchange, Upbit, had launched a crypto lending product in early July. The offering allowed users to borrow up to 80% of their crypto assets, using coins like Bitcoin and Tether. As activity surged, the FSC raised concerns about legal uncertainties surrounding such high-leverage products.
The product gained fast popularity, especially among retail users seeking short-term profits. However, the FSC stressed that these offerings lacked clear legal foundation under current laws. “Exchanges must not offer lending services that operate in a legal gray zone,” stated the FSC.
Officials said this regulatory void left investors exposed to rapid liquidations and extreme market volatility. Many borrowers faced forced asset sales as prices fell. The FSC said these risks threatened market integrity and investor protection.
Bithumb and Smaller Exchanges Amplify Market Risks
Bithumb, another major exchange in South Korea, introduced even more aggressive lending options. Its model let users borrow up to four times their crypto deposits. Following Bithumb, smaller exchanges quickly introduced similar services to remain competitive.
In just four weeks, 27,600 users borrowed over 1.5 trillion won, equivalent to $1.1 billion. The FSC revealed 13% of borrowers were liquidated due to collateral price drops. This data reflected the volatility of the local crypto market and the consequences of unregulated lending.
South Korea’s FSC also flagged abnormal price behavior in Tether following the lending launch. The coin temporarily lost its dollar peg after mass sell-offs, affecting investor confidence. Authorities described the event as a direct impact of unchecked leveraged lending.
New Framework Planned as FSC Suspends All Lending
Despite the suspension, South Korea’s FSC confirmed it does not intend to ban crypto lending permanently. Instead, it is drafting a regulatory framework to clarify legal guidelines and improve investor safeguards. The goal is to integrate lending within a secure digital finance system.
The FSC’s new policy permits exchanges to manage current contracts and allow repayments or extensions. However, all new lending activity remains banned. Non-compliance may lead to site inspections and possible enforcement measures.
South Korea is currently finalizing the Digital Asset Basic Act to govern digital finance. It also plans to approve institutional crypto trading and spot ETFs. The FSC stated,
“We aim to build a transparent and stable crypto market for South Korea.”
