South Korea Halts New Crypto Lending to Curb Market Leverage Risk

South Korea’s Financial Services Commission (FSC) has temporarily halted new crypto lending services on domestic exchanges to address growing concerns over market leverage and investor protection. The directive was issued in response to recent market instability, including a significant liquidation event at a local exchange, where 13% of 27,000 customers using Bithumb’s lending services faced asset liquidation as prices dropped [1]. The move reflects a broader global trend of regulatory scrutiny in the digital asset space, as governments seek to balance innovation with prudential oversight [2].

Under the order, exchanges are prohibited from launching new lending products until clear regulatory guidelines are established. However, existing contracts remain valid and can be either extended or repaid under current terms [3]. Non-compliant platforms may be subject to on-site inspections and enforcement actions [4]. This intervention aims to mitigate risks such as insolvency, liquidity issues, and investor losses, which have intensified as crypto lending becomes more popular [5].

The FSC’s decision also highlights the growing leverage in the crypto market, with outstanding crypto-collateralized borrows reaching $44.25 billion in the most recent quarter—a 30% increase from the previous period [6]. Such high levels of leverage raise concerns about systemic risks, especially in a market known for its volatility. The FSC’s approach sets a precedent for other countries considering similar regulatory measures [7].

In the short term, the FSC has urged exchanges to pause lending operations and prepare for potential audits and compliance reviews. While no specific timeline has been announced for the development of a formal regulatory framework, the urgency of the measure underscores the commission’s commitment to investor safety [8]. Once finalized, the new rules are expected to require platforms to restructure their lending models, incorporate transparency mechanisms, and obtain official approval before resuming services [9].

The broader implications of South Korea’s move are significant. By prioritizing investor protection and financial stability, the country is reinforcing the importance of accountability and transparency in digital finance. This decision not only addresses immediate risks but also contributes to the long-term development of a more resilient and sustainable crypto market [10]. It also signals that regulatory responses to leveraged products may become more common in other jurisdictions, as policymakers seek to manage the risks associated with rapid innovation in the digital asset sector [11].

South Korea’s proactive stance underscores its role as a regulatory leader in the global crypto landscape. The FSC’s actions provide a model for how authorities can respond to systemic risks in a fast-evolving market. As the global conversation around leverage and investor protection continues, the country’s approach may shape the broader regulatory environment for digital assets.

Source:

[1] South Korea Halts Crypto Lending as Market Leverage (https://decrypt.co/335806/south-korea-halts-crypto-lending)

[2] South Korea Bans New Crypto Lending Products to Curb (https://www.ainvest.com/news/south-korea-bans-crypto-lending-products-curb-financial-risks-2508/)

[3] South Korea's FSC HALTS CRYPTO LENDING AWAITING (https://www.coinrank.io/crypto/south-koreas-fsc-halts-crypto-lending-awaiting-regulatory-guidelines/)

[4] South Korea Orders Exchanges to Halt Crypto Lending (https://m.fastbull.com/news-detail/south-korea-orders-exchanges-to-halt-crypto-lending-news_6100_0_2025_3_8382_3)

[5] South Korea Orders Immediate Halt to All Crypto Lending (https://tradersunion.com/news/cryptocurrency-news/show/443304-south-korea-orders-immediate-halt/)

[8] South Korea Orders Crypto Exchanges to Halt Lending (https://coincu.com/355808-south-korea-crypto-lending-halt-2)

[9] South Korea Tells Crypto Firms to Stop Launching New Lending Products as Leverage Risk Builds (https://cryptoadventure.com/kindlymd-closes-200m-convertible-note-funding-for-more-bitcoin/)