South Korea Halts New Crypto Lending Amid Market Volatility and Regulatory Uncertainty

South Korea’s Financial Services Commission (FSC) has suspended all new crypto lending services on domestic exchanges, citing growing regulatory uncertainty and investor risk. The directive, issued as part of administrative guidance, affects major platforms including Upbit and Bithumb. While existing lending contracts remain valid, new services are halted until formal regulations are established [1].

The move comes after a rapid surge in crypto lending activity, with over 1.5 trillion won ($1.1 billion) in borrowing within a month of the services launching. However, market volatility led to the forced liquidation of approximately 13% of these positions, triggering broader market instability. The FSC noted that the services currently exist in a legal gray area and pose a high risk of user losses, particularly due to the unpredictable nature of crypto asset prices [2].

The FSC emphasized that the suspension aims to address the growing instability in the market, particularly from leveraged borrowing. Platforms had introduced various forms of lending—Upbit offered borrowing against Korean won and digital assets, while Bithumb allowed leverage of up to four times the collateral value. However, both platforms suspended operations recently amid intensifying regulatory scrutiny [3].

The FSC’s intervention follows the ruling party’s proposal for the Digital Asset Basic Act, which seeks to formalize regulations for crypto lending. The regulator’s cautious stance reflects broader efforts to balance innovation with investor protection, even as the government pushes forward with initiatives like approving the country’s first spot crypto ETFs and easing restrictions on institutional trading [4].

The suspension is expected to have immediate financial implications, including a potential contraction in Total Value Locked (TVL) in centralized Korean exchange lending pools. Analysts suggest that the move could lead to reduced liquidity and the emergence of arbitrage opportunities between Korean and international exchanges [5]. Furthermore, the FSC has warned that non-compliant exchanges could be subject to on-site inspections, reinforcing the seriousness of the regulatory crackdown [6].

The regulatory action aligns with previous interventions in high-risk financial sectors, such as the 2023 ban on anonymous crypto trading. Analysts are now watching closely for potential spillover effects into decentralized finance (DeFi) and for how restrictions may impact user behavior, including increased migration to international platforms [6].

Source:

[1] https://cointelegraph.com/news/south-korea-crypto-lending-ban-guidelines

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

[3] https://www.blockhead.co/2025/08/19/south-korea-suspends-crypto-lending-services-after-1-1-billion-in-borrowing-triggers-market-disruption/