South Korea Bans Crypto Lending as FSC Cuts Retail Investor Exposure to 0%

South Korea’s Financial Services Commission (FSC) has issued an immediate ban on crypto lending activities across domestic exchanges, effective August 19, 2025. The directive is part of a broader regulatory response to the rapid growth of leveraged lending products and concerns over retail investor exposure to market volatility. The FSC cited the need to protect individual traders from the risks of liquidations and financial instability, particularly as the use of leveraged loans surged over recent months [1].

Prior to the ban, several major exchanges, including Bithumb and Upbit, had launched crypto lending services offering varying degrees of leverage. Bithumb, for example, had already reduced its lending leverage to 2X in August 2025. However, the regulator now requires all exchanges to cease new lending activities entirely. While existing loans can remain active until repaid, no new borrowing arrangements can be initiated under the new rules [1].

The swift regulatory action came in response to growing concerns about the scale and nature of crypto lending. In one month alone, retail investors borrowed the equivalent of $1.1 billion through exchange-based lending, distributed across 27,600 accounts. Around 13% of these loans were liquidated due to market price fluctuations, underscoring the systemic risks posed by such financial products [1].

This move aligns with a wider regulatory strategy to stabilize South Korea’s crypto market. The FSC had been discussing lending regulation for months but opted for a direct and immediate intervention in light of the fast-paced development of leveraged products. The regulator has also been working on formalizing broader crypto regulations, including preparations for spot ETFs and eventual oversight of stablecoins [1].

The influence of South Korean crypto lending extends beyond local markets. The country plays a significant role in shaping the trading volumes of certain cryptocurrencies, particularly XRP, with approximately 13.97% of its volume linked to South Korean loans. Meme coins and altcoins have also seen outsized price movements driven by strong Korean won exposure, as local exchanges prioritize assets with proven market longevity [1].

The immediate lending ban is expected to impact liquidity and speculative activity in the short term. With exchanges prohibited from launching new lending platforms, the market may experience a temporary slowdown in leveraged trading. However, the FSC has indicated that lending could resume once new regulatory frameworks and safety mechanisms are in place. This suggests a potential long-term shift toward a more structured and investor-protected lending environment [1].

The regulatory intervention reflects South Korea’s broader balancing act between fostering innovation and safeguarding retail investors in the evolving crypto sector. As global markets continue to grapple with the risks and opportunities of decentralized finance, South Korea’s proactive stance may serve as a reference point for other jurisdictions considering similar measures [1].

Source: [1] South Korea calls for an immediate halt on crypto lending (https://www.cryptopolitan.com/south-korea-halt-crypto-lending-exchanges/)