South Korea Halts Risky Crypto Lending to Shield 16 Million Investors

South Korea’s Financial Services Commission (FSC) has implemented new regulatory guidelines for cryptocurrency lending services on centralized exchanges, capping interest rates at 20% per annum and prohibiting leveraged lending that exceeds collateral value. The guidelines aim to mitigate investor risk and enhance transparency in a rapidly expanding market that saw over 27,600 individuals borrow $1.1 billion in a single month, with 13% facing liquidation due to market volatility [5]. The FSC, in collaboration with the Financial Supervisory Service and the Digital Asset Exchange Alliance (DAXA), published the “Virtual Asset Lending Guidelines” on September 5, 2025, with immediate effect [5].

The new rules define the scope of virtual asset lending by referencing global regulatory models and emphasize user protection measures. Lending services are restricted to the top 20 cryptocurrencies by market capitalization or those listed on at least three local exchanges. Assets designated as cautionary or subject to trading restrictions are excluded from lending programs. Additionally, platforms must notify users in advance of potential liquidation risks and allow them to add capital to positions to avoid forced closure [4].

A key provision in the guidelines prohibits the use of third-party services for lending operations to prevent regulatory circumvention. Exchanges are required to use their own capital to issue loans, and any demand for repayment in fiat currency is considered a violation of lending laws. This measure aligns with the FSC’s broader objective of preventing conflicts with existing credit regulations [3].

The regulatory framework also introduces borrower eligibility criteria based on trading experience and transaction history. Lending limits range from 30 million to 70 million won, and first-time borrowers must complete online training and suitability assessments provided by DAXA. These steps are intended to ensure that users are aware of the risks associated with crypto lending and meet basic competency standards [5].

The FSC announced the guidelines following a temporary suspension of lending services in late August, which was imposed after local exchanges such as Upbit and Bithumb introduced high-risk lending products. These included programs offering loans up to four times the value of collateral, exacerbating concerns about regulatory arbitrage and investor harm [5]. The new rules reflect the FSC’s intent to formalize oversight and potentially enshrine these standards into law in the future [1].

The regulatory intervention underscores South Korea’s cautious approach to managing the cryptocurrency market amid growing adoption. With over 16 million crypto exchange users in the country—accounting for more than 30% of the population—authorities are balancing innovation with risk mitigation [5]. The FSC has also indicated that it will continue to monitor the sector closely, with plans to establish a virtual asset monitoring committee in collaboration with the central bank [3].

Source:

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

[2] South Korea will limit the maximum interest rate for ... (https://www.chaincatcher.com/en/article/2203545)

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

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

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