South Korea's Crypto Rules Prioritize Investor Safety Over Speed

South Korea’s Financial Services Commission (FSC) has introduced stringent new rules to regulate cryptocurrency lending services, aiming to enhance investor protection and stabilize the digital asset market. The guidelines, issued on Friday, prohibit leveraged lending that exceeds the value of the collateral and cap interest rates at 20% [1]. These measures are intended to curb excessive borrowing and reduce the likelihood of large-scale liquidations, which have previously caused significant losses for investors [3].

Under the new framework, only the top 20 cryptocurrencies by market capitalization or those traded on three or more licensed local exchanges can be offered for lending. If a cryptocurrency is flagged as cautionary by exchanges, lending services for that asset must be suspended [1]. The FSC also emphasized that lending must be conducted using the service providers’ own capital, and third-party intermediaries are not permitted, ensuring greater accountability [3]. Furthermore, the rules restrict products that require repayment in fiat currency, preventing a blurring of lines between traditional financial systems and virtual asset lending [3].

User protection remains a central focus of the new regulations. The guidelines impose lending limits based on a user’s experience and transaction history, ensuring that less experienced investors are not exposed to undue risk. Additionally, users must be notified in advance if their positions are at risk of liquidation, giving them time to manage their exposure [1]. First-time borrowers are required to complete an online educational course and pass a qualification test administered by the Digital Asset Exchange Alliance (DAXA), an industry self-regulatory body [3].

The FSC has tasked DAXA with overseeing the implementation of these guidelines and plans to legislate the rules based on the outcomes of the initial rollout. This follows a temporary suspension of lending operations by local exchanges such as Upbit and Bithumb, ordered by the FSC on August 19 in response to the rapid expansion of such services [1]. The regulator cited the need for a clearer legal framework and stronger consumer safeguards to prevent potential abuses and ensure market stability [3].

Analysts note that the new rules reflect a global trend of regulators tightening oversight in the digital asset space. South Korea’s approach aligns with international efforts to balance innovation with investor protection. By learning from past market instability and leveraging insights from traditional finance, the country is positioning itself as a model for responsible crypto lending [3]. While some Virtual Asset Service Providers (VASPs) may face initial compliance challenges, the long-term benefits include greater trust, institutional adoption, and a more resilient market.

The FSC has also signaled its intent to refine these regulations over time, emphasizing that the final form of the rules will depend on their practical application and impact. This iterative process allows for adjustments based on real-world data and feedback, ensuring that the regulatory framework remains responsive to evolving market conditions and investor needs [1].

Source:

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

[2] South Korea will limit the maximum interest rate for ... (https://www.chaincatcher.com/en/article/2203545)

[3] South Korean Crypto Lending Rules: Crucial New ... (https://www.mexc.com/news/south-korean-crypto-lending-rules-crucial-new-guidelines-strengthen-user-protection/85732)