South Korea’s Regulators Clamp Down on Crypto Lending to Shield Risky Investors

South Korea’s Financial Services Commission (FSC) has introduced stringent regulations to govern crypto lending services, capping interest rates at 20% annually and banning leveraged loans that exceed the value of collateral. The measures, announced on September 5, aim to protect investors from the risks associated with unregulated lending practices and market volatility. Under the new guidelines, only the top 20 cryptocurrencies by market capitalization or those listed on at least three Korean won-based exchanges are eligible for lending services. Assets designated as cautionary by exchanges are also excluded from such programs [1].

The regulatory intervention follows a surge in crypto lending activity since July, when platforms such as Upbit and Bithumb launched programs offering high leverage. For example, Bithumb allowed users to borrow up to four times their holdings, while Upbit permitted borrowing of up to 80% of deposited values using Tether, Bitcoin, and XRP as collateral. These practices prompted the FSC to order a temporary suspension of all lending services on August 18 due to regulatory concerns. Inspections revealed that over 27,600 investors had borrowed a total of $1.1 billion in a single month, with 13% of them facing forced liquidation as a result of market volatility [2].

To enhance user protection, the FSC mandates that exchanges must now use their own capital for lending services and are prohibited from engaging in third-party collaborations or outsourcing to circumvent regulations. The guidelines also require mandatory online training and suitability tests for first-time borrowers through programs administered by the Digital Asset Exchange Alliance (DAXA). Borrowing limits are set between 30 million and 70 million won, depending on an individual’s trading experience and transaction history [3].

The FSC emphasized that the new rules are designed to promote transparency, fairness, and market stability. Exchanges are required to publicly disclose loan statuses and instances of forced liquidation. Additionally, users must be notified in advance if they are at risk of liquidation, and they must be allowed to add capital to avoid it. The FSC also noted that the rules are part of a broader regulatory approach to address the perceived risks of cryptocurrency, including its price volatility and lack of intrinsic value [4].

The FSC plans to refine the regulations through legislative action based on the outcomes of the initial implementation. The guidelines are currently overseen by DAXA, a self-regulatory body aligned with local financial authorities. This move reflects a growing emphasis on crypto regulation in South Korea, where crypto exchange user numbers have surpassed 16 million, representing over 30% of the country’s population. However, some analysts argue that the rapid adoption of crypto in South Korea is driven more by financial desperation among the youth than by a deep understanding of the technology [5].

Source:

[1] title1 (https://www.theblock.co/post/369574/south-korea-crypto-lending-guideline)

[2] title2 (https://cointelegraph.com/news/fsc-caps-crypto-lending-rates-south-korea)

[3] title3 (https://finance.yahoo.com/news/south-korea-caps-crypto-lending-101212429.html)

[4] title4 (https://www.chaincatcher.com/en/article/2203545)