South Korea's Crypto Crackdown Aims to Protect Retail Investors

South Korea has introduced stringent new regulations for cryptocurrency lending services, capping interest rates at 20% and banning leveraged loans that exceed the value of collateral. The Financial Services Commission (FSC) announced the guidelines on Friday, aimed at enhancing investor protection and aligning the domestic market with global regulatory standards. These measures follow a temporary suspension of lending operations by major local exchanges, including Upbit and Bithumb, ordered by the FSC on August 19 in response to rapid expansions of such services [1].

The rules define the scope of virtual asset lending services and emphasize user safeguards. One of the key provisions is the prohibition of leveraged loans where the borrowed amount exceeds the value of the collateral provided. This is intended to mitigate the risks associated with over-leveraged positions, which have been a concern in the volatile crypto market. Additionally, the 20% interest rate cap is designed to prevent exploitative practices and ensure a fairer environment for borrowers [2].

The FSC has also imposed restrictions on the types of cryptocurrencies eligible for lending. Only the top 20 cryptocurrencies by market capitalization, or those listed on three or more licensed exchanges, can be offered for lending. If a cryptocurrency is flagged by exchanges as cautionary—typically due to regulatory concerns or volatility—lending services for that asset must be suspended. This limitation aims to reduce exposure to less stable or potentially risky assets [3].

To prevent regulatory arbitrage, the guidelines require lending platforms to use their own capital rather than circumventing rules through third-party partnerships. This ensures that service providers remain fully accountable for their operations and reduces the likelihood of shifting risk to unregulated entities. Furthermore, the FSC has mandated tailored lending limits for users, based on their trading experience and history. Borrowers must also be notified in advance if their positions are at risk of liquidation, providing them with time to mitigate potential losses [1].

The implementation of the new rules is overseen by the Digital Asset Exchange Alliance (DAXA), a joint consultative body in compliance with local regulators. The FSC has indicated that it plans to formalize these guidelines into legislation, based on the outcomes of their implementation. This step reflects a broader global trend of increased scrutiny and regulation in the cryptocurrency sector, as authorities seek to protect retail investors from high-risk financial products [3].

The FSC emphasized that the guidelines are informed by international practices, aiming to balance innovation with investor safety. By introducing these controls, South Korea signals its intent to foster a more disciplined and sustainable digital asset market. The regulatory adjustments are expected to reduce systemic risks while maintaining a conducive environment for technological advancements in financial services.

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 will limit the maximum interest rate for ... (https://www.chaincatcher.com/en/article/2203545)

[3] South Korea Tightens Rules on Crypto Lending Platforms (https://cryptodnes.bg/en/south-korea-tightens-rules-on-crypto-lending-platforms/)