South Korea Stacks Investor Protection Amid Crypto Surge

South Korea’s Financial Services Commission (FSC) has introduced a new regulatory framework for cryptocurrency lending services, imposing a 20% cap on interest rates, banning leveraged loans, and restricting lending to only the top 20 cryptocurrencies by market capitalization or those listed on at least three local won-based exchanges [1]. The new regulations, which took effect in late August 2025, aim to mitigate risks for retail investors and enhance oversight in a rapidly growing sector [2]. The FSC emphasized that these measures are part of a broader strategy to protect investors and ensure market stability in response to the surge in crypto adoption and the introduction of leveraged lending services by major exchanges [1].

Under the new rules, crypto lending services must be provided directly by exchanges using their own capital, with indirect lending through third-party collaborations or outsourcing prohibited to prevent regulatory evasion [1]. Additionally, users are required to receive advance notice of potential liquidations, and they must be allowed to add capital to a position to avoid forced liquidation. Borrowers are also subject to online training and suitability assessments, particularly for first-time users, to ensure they understand the risks involved [2]. These requirements are enforced by the Digital Asset eXchange Alliance (DAXA), the local self-regulatory body overseeing compliance [1].

The FSC’s decision comes amid heightened scrutiny from regulators and policymakers, with Lee Eok-won, the nominee for FSC chair, recently criticizing cryptocurrency for its volatility and lack of intrinsic value [1]. In late July, the central bank announced plans to establish a virtual asset monitoring committee to further regulate the crypto market. This regulatory shift reflects a growing concern over the speculative nature of crypto lending and the potential for systemic risks in an industry that has seen rapid adoption but limited oversight [2].

Despite these regulatory moves, cryptocurrency continues to attract a large user base in South Korea. As of late March 2025, the number of crypto exchange users in the country exceeded 16 million, representing over 30% of the population [1]. This surge is attributed in part to the younger generation’s financial challenges and a growing appetite for alternative investment vehicles. However, experts like Eli Ilha Yune, chief product officer at Anzaetek, argue that South Korea’s crypto adoption is driven more by economic desperation than by a belief in decentralized technologies such as Web3 [1]. The FSC’s new regulations aim to temper such speculation while ensuring that lending services remain accessible and transparent.

The impact of these rules is expected to be most pronounced for Ethereum and other major cryptocurrencies that qualify under the lending criteria. While smaller tokens may lose access to lending platforms, the FSC has indicated a willingness to review and potentially expand the list of eligible assets based on market feedback and implementation outcomes [2]. The move also aligns with global regulatory trends aimed at standardizing crypto lending practices and protecting retail investors from excessive risk. The FSC’s approach highlights a delicate balance between fostering innovation and maintaining financial stability in the evolving digital asset landscape [1].

Source:

[1] South Korea caps crypto lending rates at 20%, bans ... (https://cointelegraph.com/news/fsc-caps-crypto-lending-rates-south-korea)

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