South Korea’s top financial regulator has ordered local crypto exchanges to temporarily suspend all crypto lending services. The Financial Services Commission (FSC) issued the administrative guidance amid concerns over a legal gray area and risks to investors.
Local exchanges have been ordered to suspend all crypto lending services until South Korea’s financial regulator has established a suitable regulatory framework to curb hazardous lending practices in the digital asset sector.
On Tuesday, the Financial Services Commission (FSC) confirmed that it had issued administrative guidance to exchanges, instructing them to cease operations that permit users to borrow against cryptocurrencies or fiat deposits.
The decree is effective immediately and will remain in effect until the new lending regulations are finalized.
Increased Risks and Rapid Growth
Since early July, the prevalence of crypto lending services has increased significantly. Upbit has implemented a program that allows users to borrow up to 80% of the value of their deposits in Korean won or digital assets, with Tether (USDT), Bitcoin, and XRP serving as collateral.
Its competitor, Bithumb, introduced a comparable product, which provided loans up to four times the value of a customer’s holdings. Other local platforms promptly adopted the same approach.
The launches were timed to align with the ruling party’s proposal for the Digital Asset Basic Act, which aims to authorize lending services within exchange operations formally.
Nevertheless, last month, the FSC issued a warning that the products were in a regulatory gray area and posed substantial risks.
In its most recent announcement, the regulator disclosed that approximately 27,600 investors borrowed 1.5 trillion won ($1.1 billion) during the initial month of a lending program operated by a single company.
According to the FSC, market volatility necessitated the liquidation of approximately 13% of borrowers. It also emphasized an uncommon sell-off in USDT precipitated by the lending services, which temporarily disrupted stablecoin pricing on Korean platforms.
The FSC emphasized its intention to establish a transparent regulatory framework for digital asset lending.
The agency will promptly establish guidelines to safeguard users and maintain market stability. It also noted that existing loans can still be repaid or extended under their current contracts.
Exchanges that violate the suspension order are subject to on-site inspections. Upbit and Bithumb had previously suspended lending in July; however, Bithumb resumed operations under more stringent conditions before the new suspension.
South Korea Relaxes Cryptocurrency Regulations, Creating Opportunity for First-Spot ETFs
The enforcement is part of South Korea’s broader transition to regulated cryptocurrency adoption. The government is in the process of removing restrictions on institutional trading and is preparing to sanction the country’s first spot crypto ETFs.
President Lee Jae Myung’s administration is also developing a stablecoin framework linked to the Korean won, indicating a more liberal stance toward digital finance despite the most recent restrictions.
Dunamu, the operator of Upbit, South Korea’s largest cryptocurrency exchange, recently introduced a new custody service designed for corporate and institutional clients. This move is in response to the increasing demand for secure storage solutions, which regulatory approvals for virtual asset investments have fueled.
The service safeguards holdings from cyberattacks and other external breaches by storing all deposited digital assets in cold wallets, which are wholly offline and protected from internet-based threats.
