South Korea Suspends Crypto Lending After $1.1 Billion Borrowing Triggers Market Volatility

South Korea has enforced a nationwide suspension of crypto lending services on domestic exchanges to mitigate regulatory uncertainties and emerging market risks. The directive, issued by the Financial Services Commission (FSC), took effect in late July and early August 2025, requiring exchanges to halt all new lending activities and suspend ongoing ones until clear regulatory frameworks are established [1][2][3]. This decision came in response to a surge in leveraged trading, which led to over $1.1 billion in borrowing within a single month and triggered price volatility and market distortions [5].

The FSC emphasized investor protection as a key concern, highlighting that crypto lending currently exists in a legal gray area. This lack of clarity has exposed borrowers to significant risk, particularly during rapid price movements. Reports indicate that around 13% of borrowers faced liquidation due to sharp price swings, while the sudden increase in USDT lending created abnormal sell pressure, disrupting stablecoin pricing and fostering arbitrage opportunities between Korean and global markets [5].

Major exchanges such as Upbit and Bithumb had previously introduced lending services under the proposed Digital Asset Basic Act, which aims to formalize and regulate the activity. For instance, Upbit allowed users to borrow against Korean won deposits and crypto holdings, whereas Bithumb offered leverage of up to four times the collateral value [5]. However, both platforms ceased their lending services in early August as regulatory scrutiny intensified [5].

The FSC stated that existing lending contracts may mature or be extended until new regulations are finalized. It also warned of potential on-site inspections for non-compliant exchanges. The suspension reflects a cautious approach to financial innovation, contrasting with South Korea’s broader efforts to support the digital asset sector, including the recent approval of its first spot cryptocurrency ETFs and a gradual easing of institutional trading restrictions [5].

The regulator has pledged to develop a regulatory framework "promptly," balancing market development with investor protection. This move underscores the complexity of regulating a fast-evolving sector and highlights the government’s preference for stability over speed in the implementation of new financial instruments [5].

Sources:

[1] The, [https://www.theblock.co/post/367368/south-korea-halt-crypto-lending](https://www.theblock.co/post/367368/south-korea-halt-crypto-lending)

[2] AInvest, [https://www.ainvest.com/news/south-korea-halts-crypto-lending-address-legal-market-risks-2508/](https://www.ainvest.com/news/south-korea-halts-crypto-lending-address-legal-market-risks-2508/)

[3] Cryptopolitan, [https://www.cryptopolitan.com/south-korea-halt-crypto-lending-exchanges/](https://www.cryptopolitan.com/south-korea-halt-crypto-lending-exchanges/)

[4] The, [https://thecryptobasic.com/2025/08/19/south-korea-suspends-crypto-lending-till-clear-guidelines/](https://thecryptobasic.com/2025/08/19/south-korea-suspends-crypto-lending-till-clear-guidelines/)

[5] blockhead.co, [https://www.blockhead.co/2025/08/19/south-korea-suspends-crypto-lending-services-after-1-1-billion-in-borrowing-triggers-market-disruption/](https://www.blockhead.co/2025/08/19/south-korea-suspends-crypto-lending-services-after-1-1-billion-in-borrowing-triggers-market-disruption/)