South Korea's FSC Rewrites Crypto Lending Rules to Guard Against Volatility and Fraud

South Korea’s Financial Services Commission (FSC) has introduced comprehensive new regulations for virtual asset lending, signaling a decisive shift toward protecting users and mitigating systemic risks in the crypto market. These rules, issued in late 2025, aim to address persistent issues such as over-leveraged positions and market manipulation, which contributed to a $1 billion liquidation event in August 2025. The regulations prohibit loans exceeding the value of posted collateral, bar the issuance of fiat-denominated loans in Korean won, and require Virtual Asset Service Providers (VASPs) to offer lending services using their own corporate assets, rather than through third-party partnerships or consignment arrangements. This move enhances accountability and transparency while reducing direct links to traditional financial systems [1].

A central focus of the new framework is user protection, particularly for first-time borrowers. Under the guidelines, all new users must complete an online educational course and pass a qualification test provided by the Digital Asset eXchange Alliance (DAXA), an industry self-regulatory body. This ensures that participants have a foundational understanding of the risks and mechanics of crypto lending before engaging. Furthermore, VASPs are required to set individual lending limits based on a user’s experience and trading history, mirroring similar practices in traditional stock markets. Borrowers will also receive advance notifications in the event of potential forced liquidation, providing them with an opportunity to manage their positions proactively [1].

Eligible assets for lending are restricted to cryptocurrencies ranked within the top 20 by market capitalization or those listed on at least three won-denominated exchanges. This criterion ensures that only more established and liquid assets are used, reducing the volatility risk typically associated with smaller, less-traded tokens. The FSC also emphasized the importance of maintaining market integrity, citing the need to curb manipulative practices such as artificial trading volume and price exploitation—issues recently addressed in its first enforcement action under the Virtual Asset User Protection Act (VAUPA) [3].

The FSC’s actions align with broader efforts to integrate South Korea’s large personal lending market into a secure digital finance system. While the new rules may lead to initial operational costs for VASPs, the long-term benefits include enhanced user trust, market stability, and a clearer regulatory landscape. These measures are expected to attract institutional participation and foster sustainable growth in the digital asset sector. The FSC has also been working on drafting the Digital Asset Basic Act, which aims to establish a comprehensive institutional framework for cryptocurrency innovation while prioritizing consumer protection [3].

GlobalData analysts note that national regulation remains the most significant determinant in the development of the crypto lending space, particularly in markets like South Korea where the personal lending market is valued at half a trillion dollars. The FSC’s approach reflects a global trend toward balancing innovation with investor safeguards, setting a precedent for other jurisdictions. As traditional financial institutions increasingly engage with crypto—such as JPMorgan’s integration with Coinbase’s platform—regulators like the FSC are positioning themselves to ensure that the digital asset ecosystem evolves within a stable and transparent framework [2].

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[1] South Korean Crypto Lending Rules: Crucial New ... (https://bitcoinworld.co.in/korea-tightens-crypto-lending-rules/)

[2] Can crypto lending return on the back of regulatory wave (https://www.retailbankerinternational.com/analyst-comment/can-crypto-lending-return-on-back-of-regulatory-wave/)

[3] South Korean Regulator Fines First Crypto Whale Under ... (https://coinedition.com/south-korean-regulator-fines-first-crypto-whale-under-new-law/)