South Korea Cracks Down on Crypto Lending to Shield Investors from Volatile Markets

South Korea has introduced stringent regulatory measures to govern the rapidly expanding crypto lending sector, following widespread concerns over investor risks and market instability. The Financial Services Commission (FSC), in collaboration with the Financial Supervisory Service and the Digital Asset Exchange Association (DAXA), announced the “Virtual Asset Lending Guidelines” on September 5. The guidelines impose a 20% annual interest rate cap on lending services and prohibit leveraged lending that exceeds the value of collateral. These measures aim to curb excessive risk-taking and address a surge in borrowing activity that saw 27,600 investors lend $1.1 billion in a single month, with 13% of those loans facing forced liquidation due to market volatility [1].

The regulatory response was precipitated by aggressive lending practices from major exchanges such as Upbit and Bithumb, which offered loan-to-value ratios as high as 80% and four times, respectively. In early August, the FSC temporarily suspended all lending services to investigate regulatory gray areas. The findings revealed systemic vulnerabilities, prompting the new framework to limit exposure and prevent a repeat of such scenarios. Under the rules, Korean won cash lending is entirely banned, and exchanges must use only their own capital for lending operations, effectively eliminating third-party or collaborative lending structures [1].

The FSC has also restricted lending eligibility to the top 20 cryptocurrencies by market capitalization or assets traded on at least three licensed exchanges in South Korea. Any cryptocurrency under trading restrictions or suspected of abnormal activity is excluded from lending programs. Additionally, the guidelines mandate that first-time borrowers complete mandatory online training and aptitude tests sponsored by DAXA. These safeguards aim to ensure borrowers are adequately informed of the risks associated with crypto lending [1].

To enhance transparency, exchanges are required to disclose loan status by product and report instances of forced liquidation. Borrowing limits vary from 30 million to 70 million won, depending on users’ trading experience and transaction history. This tailored approach is intended to prevent overexposure, particularly among inexperienced traders. The FSC emphasized that the guidelines are part of a broader effort to align the local market with international standards while promoting investor protection and market stability [4].

The implementation of these guidelines marks a significant shift in South Korea’s regulatory stance, signaling a move toward a more disciplined digital asset market. The FSC will monitor the effectiveness of the new rules and may legislate them based on implementation outcomes. By curbing risky lending practices, the government aims to reduce the likelihood of abrupt market corrections and ensure a sustainable development path for the crypto industry [3]. The immediate enforcement of the rules underscores the urgency of addressing systemic vulnerabilities and reflects a global trend of increased regulatory scrutiny in the crypto space [4].

Source:

[1] South Korea Caps Crypto Lending at 20% Interest, Bans Over ... (https://finance.yahoo.com/news/south-korea-caps-crypto-lending-101212429.html)

[2] South Korea caps crypto lending at 20% interest, bans ... (https://www.theblock.co/post/369574/south-korea-crypto-lending-guideline)

[3] South Korea Tightens Rules on Crypto Lending Platforms (https://cryptodnes.bg/en/south-korea-tightens-rules-on-crypto-lending-platforms/)