South Korea’s FSC Cracks Down: Retail Investors Get a Safety Net

South Korea’s Financial Services Commission (FSC) has introduced stringent regulations for cryptocurrency lending services, imposing a 20% annual interest rate cap and banning leveraged loans that exceed the value of the collateral. The new guidelines, issued on September 5, aim to protect retail investors and reduce risks associated with volatile crypto markets [1]. The FSC cited the need for investor protection, stating that the rules are informed by global best practices and designed to address regulatory gaps that had previously allowed rapid expansion of lending services on centralized exchanges [1].

The regulations prohibit leveraged lending that allows users to borrow more than the value of their collateral, a practice that had been introduced by platforms such as Upbit and Bithumb. These exchanges had enabled users to borrow up to 80% or four times the value of their crypto holdings, respectively [2]. In response to these developments, the FSC suspended all crypto lending services in mid-August while it developed the new framework. The regulator noted that over 27,600 investors had borrowed a total of $1.1 billion in one month alone, with 13% of them facing forced liquidation due to market volatility [3].

To further safeguard users, the FSC mandated that only the top 20 cryptocurrencies by market capitalization, or those traded on at least three Korean won-based exchanges, can be lent out. This restriction is intended to limit exposure to lower-quality or speculative assets. Additionally, the guidelines prohibit the use of third-party services to circumvent lending rules and require platforms to use only their own capital for lending operations [4]. Exchanges must also implement individual lending limits based on users’ trading experience and transaction history, ranging from 30 million to 70 million won.

The FSC emphasized the importance of transparency, requiring platforms to notify users in advance of potential liquidation risks and to publicly disclose loan statuses and liquidation events. First-time borrowers must complete online training and aptitude tests organized by the Digital Asset Exchange Alliance (DAXA), a self-regulatory body overseeing compliance with the new rules [5]. The regulator also reiterated that loan repayment in fiat currency is not permitted, as it would conflict with local lending laws [6].

The introduction of these measures marks a broader shift in South Korea’s regulatory approach to cryptocurrencies. Lee Eok-won, the nominee for FSC chairman, has previously expressed skepticism about the stability and intrinsic value of crypto assets, noting their price volatility and lack of monetary function [7]. The FSC plans to incorporate the new guidelines into formal legislation based on their implementation outcomes. The regulatory move comes amid growing scrutiny of the crypto sector, with South Korea’s central bank reportedly planning to establish a virtual asset monitoring committee.

Source:

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

[2] South Korea Caps Crypto Lending at 20% Interest, Bans Over ... (https://finance.yahoo.com/news/south-korea-caps-crypto-lending-101212429.html)

[3] South Korea Implements New Rules for Crypto Loans (https://forklog.com/en/south-korea-implements-new-rules-for-crypto-loans/)

[4] South Korea caps crypto lending at 20% interest, bans ... (https://www.theblock.co/post/369574/south-korea-crypto-lending-guideline)