Regulators Clamp Down as Crypto Lending Booms in South Korea

South Korea’s stock market has seen a significant upswing, with analysts and regulators closely watching whether the momentum will extend into the cryptocurrency sector. The Financial Services Commission (FSC) recently introduced stringent regulations on virtual asset lending, responding to concerns over speculative activity and investor risk exposure. These measures include a 20% annual cap on lending interest rates and a prohibition of leveraged lending that exceeds the value of collateral. The FSC has also suspended lending services using Korean won and imposed restrictions on the types of assets available for lending.

The regulatory action came after a rapid expansion of crypto lending in the past few months, with 27,600 investors borrowing approximately $1.1 billion in July alone. About 13% of these users faced forced liquidation due to market volatility, highlighting the systemic risks posed by unregulated lending practices. The FSC and the Financial Supervisory Service (FSS) have emphasized the need for greater transparency and investor protection, with the new guidelines requiring exchanges to use only their own assets for lending and banning third-party collaborations or consignments.

Under the revised framework, only the top 20 cryptocurrencies by market capitalization or those listed on at least three Korean won exchanges are eligible for lending. Assets subject to trading restrictions or suspected of abnormal trading are excluded from participation. Additionally, first-time borrowers must complete mandatory online training and aptitude tests before accessing lending services. These measures are intended to reduce speculative behavior while ensuring that lending platforms operate within defined parameters of risk.

Meanwhile, the South Korean government has also taken a step toward easing crypto restrictions by lifting a seven-year ban on venture capital (VC) funding for crypto companies. The Ministry of SMEs and Startups announced that the ban, originally imposed in October 2018 to cool down a “speculative” market, would be lifted as of September 16. This move is seen as a signal of growing regulatory acceptance of the digital asset industry, particularly for firms with technological innovation and growth potential. The government emphasized the importance of fostering a transparent and responsible ecosystem to support the broader digital asset industry.

The FSC’s recent regulatory interventions and the government’s decision to open up VC funding highlight a broader strategy to balance market stability with innovation. While the stock market has benefited from increased institutional confidence and foreign inflows, the cryptocurrency sector remains under close scrutiny. Analysts are now assessing whether the latest regulatory shifts will encourage broader adoption or if the market will continue to be driven by short-term speculative activity.

The regulatory landscape remains fluid, with the FSC planning on-site inspections and potential legislative action based on the outcomes of the new self-regulatory framework. As the industry adjusts to these changes, the interplay between policy and market dynamics will be critical in determining the future trajectory of both the stock and crypto markets in South Korea.