South Korea's 20% Crypto Lending Cap Aims to Cool a Heated Market

South Korea has implemented a new regulatory framework to govern crypto lending services offered by centralized exchanges, aiming to enhance investor protection and mitigate risks associated with leveraged positions. The Financial Services Commission (FSC) introduced the guidelines on September 5, outlining strict measures including a 20% annual interest rate cap, prohibitions on leveraged lending that exceeds collateral value, and restrictions on asset eligibility for lending. The rules apply to the country’s top 20 cryptocurrencies by market capitalization or those traded on at least three local exchanges [1].

Under the new regime, platforms are barred from offering loans repayable in fiat currency, which the regulator deems inconsistent with credit business regulations. Service providers are required to use their own capital to fund lending activities and are strictly prohibited from engaging third-party intermediaries to circumvent the rules. Furthermore, the guidelines mandate that first-time borrowers complete an online training and suitability test administered by the Digital Asset eXchange Alliance (DAXA), an industry self-regulatory body [2].

User protection is a central focus of the regulations. Lending limits are set based on users’ trading experience and history, and platforms must proactively notify clients of potential liquidation risks. In the event of forced liquidation, users are permitted to add capital to their positions to avoid full liquidation. These measures aim to reduce impulsive trading and over-leveraging, particularly among inexperienced investors [1].

The FSC emphasized that the guidelines were developed with reference to global best practices and are intended to establish a clearer legal framework for crypto lending. The Digital Asset Exchange Alliance (DAXA) will oversee compliance with the new rules, with the FSC planning to codify the guidelines into formal legislation following an evaluation of their implementation [3]. The move follows a suspension of lending services by major local exchanges such as Upbit and Bithumb in August, prompted by concerns over the rapid introduction of leveraged lending products [1].

Industry analysts note that South Korea’s regulatory approach reflects a broader global trend toward tighter crypto oversight, driven by the sector’s increasing integration into mainstream finance. The FSC has signaled a growing skepticism toward the role of crypto in traditional financial systems, with its nominee chairman describing the asset class as volatile and lacking intrinsic value [3]. Nevertheless, the country’s youthful population continues to drive crypto adoption, with over 16 million active exchange users as of March—nearly 30% of the country’s population [3].

The new rules are expected to have significant implications for both retail and institutional investors. By limiting lending to only the most liquid and widely traded cryptocurrencies, the regulations aim to reduce exposure to speculative or unstable assets. However, some observers caution that the restrictions could also limit market innovation and reduce access to lending services for certain users. The FSC has not indicated whether it will adjust the rules in response to market feedback, emphasizing instead a commitment to maintaining a stable and transparent regulatory environment [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 Implements New Rules for Crypto Loans (https://forklog.com/en/south-korea-implements-new-rules-for-crypto-loans/)

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