South Korea Halts New Crypto Lending to Address Legal and Market Risks

South Korean regulators have ordered the temporary suspension of cryptocurrency lending services across all local exchanges, marking a decisive intervention aimed at addressing legal ambiguities and protecting investors from potential fraud and losses. The Financial Services Commission (FSC) issued the directive in early August, requiring platforms to stop offering new lending products until a regulatory framework is finalized. Existing lending contracts, however, remain valid and can be repaid or extended under current terms [1].

The FSC cited concerns over the “legal gray area” surrounding crypto lending, where the lack of defined regulatory boundaries has left the sector vulnerable to misuse and operational instability. The agency highlighted that existing lending practices pose a heightened risk of market manipulation, particularly with the rapid adoption of services allowing users to borrow Korean won or digital assets against collateral [2].

According to the FSC, in the first month of widespread lending, over 27,600 investors borrowed approximately 1.5 trillion won ($1.1 billion). A significant portion—13%—was forced to liquidate their positions due to price volatility. The agency also observed that the introduction of USDT (Tether) lending led to sharp price drops on exchanges, as the influx of sell orders disrupted market stability [3].

The suspension follows a pattern of increasing scrutiny from financial regulators, who have signaled a stronger focus on oversight in the crypto space. In late July, the FSC had already asked exchanges to reevaluate their lending models, and two major platforms—Bithumb and Upbit—had temporarily halted their services. Bithumb later resumed operations under stricter internal rules, but the FSC’s latest directive now applies to all exchanges, making the halt nationwide [4].

With the suspension in place, the FSC has indicated that it will conduct on-site inspections of non-compliant platforms and may take enforcement actions if necessary. The agency also noted that borrowers will be allowed to extend or repay their loans, ensuring a gradual transition to the expected new regulatory environment [5].

Analysts view the move as a necessary step toward stabilizing the market and building a more transparent regulatory structure. The FSC’s directive reflects a global trend in digital asset governance, where regulators are increasingly stepping in to address risks associated with high leverage, inadequate safeguards, and opaque operational practices [6].

While no official timeline has been provided for the release of new guidelines, the urgency of investor protection suggests that the process will be expedited. The industry is now expected to undergo a period of adjustment, with exchanges likely needing to revise their lending models to align with anticipated requirements related to risk management, capital adequacy, and custody protocols [7].

South Korea’s approach highlights the importance of proactive regulation in a sector that has grown rapidly without formal oversight. By addressing legal uncertainties and investor risks, the FSC is laying the groundwork for a more resilient and structured crypto lending market [8].

Source:

[1] https://crypto.news/south-korean-fsc-order-suspension-of-crypto-lending-services-heres-why/

[2] https://www.theblock.co/post/367368/south-korea-halt-crypto-lending

[3] https://www.coindesk.com/markets/2025/08/19/south-korea-tells-crypto-firms-to-stop-launching-new-lending-products-as-leverage-risk-builds

[4] https://cryptonews.com/news/south-korea-orders-crypto-exchanges-to-halt-lending-services/

[5] https://www.ainvest.com/news/south-korea-halts-crypto-lending-mitigate-investor-risks-2508/

[6] https://www.ainvest.com/news/south-korea-halts-crypto-lending-regulators-address-risks-2508/

[7] https://www.cryptotimes.io/2025/08/19/south-korea-orders-exchanges-to-halt-crypto-lending-services/

[8] https://www.coinrank.io/crypto/south-koreas-fsc-halts-crypto-lending-awaiting-regulatory-guidelines/