South Korea Shields Retail Investors with Crypto Lending Clampdown

South Korea’s Financial Services Commission (FSC) has issued new guidelines to regulate virtual asset lending services offered by centralized crypto exchanges, aiming to protect retail investors from excessive risk and market instability. Under the framework, the FSC has imposed a 20% annual interest rate cap on crypto lending products and banned leveraged loans that exceed the value of collateral. The measures, effective immediately, also prohibit hybrid lending models requiring repayment in Korean won instead of cryptocurrency, a practice regulators consider incompatible with existing credit laws [1].

The new rules emerged in response to rapid growth in crypto lending services, particularly on platforms like Upbit and Bithumb. In one month alone, 27,600 investors borrowed 1.5 trillion won ($1.1 billion), with 13% of those accounts facing forced liquidation due to market volatility. This surge prompted authorities to temporarily suspend lending operations in mid-August to address regulatory gaps. The FSC’s updated framework now mandates stricter oversight, requiring exchanges to use only their own capital for lending and prohibiting third-party partnerships that could circumvent the regulations [2].

To further mitigate systemic risk, lending services are restricted to the top 20 cryptocurrencies by market capitalization or assets traded on at least three Korean won exchanges. Cryptocurrencies designated as “cautionary” by exchanges are also barred from lending eligibility. Additionally, users must undergo mandatory training and aptitude tests before engaging in lending, with loan limits determined by trading experience and history, ranging from 30 million to 70 million won [2].

The FSC emphasized that the guidelines align with global regulatory practices while balancing innovation with investor protection. Centralized exchanges must now publicly disclose loan status and liquidation events, a move intended to enhance transparency. The Digital Asset Exchange Alliance (DAXA), a consultative body aligned with local regulators, will oversee the implementation of the new rules, with the FSC considering formal legislation based on the outcomes [1].

By imposing these restrictions, South Korea signals a broader effort to stabilize its digital asset market amid global regulatory scrutiny. The intervention reflects a growing trend in which authorities are tightening oversight on crypto lending to prevent excessive risk-taking and sudden financial shocks to retail investors. As the FSC continues to refine its approach, the focus remains on fostering a disciplined and transparent environment for virtual asset services [3].

Source:

[1] South Korea Crypto Lending Guideline (https://www.theblock.co/post/369574/south-korea-crypto-lending-guideline)

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

[3] South Korea Tightens Rules on Crypto Lending Platforms (https://cryptodnes.bg/en/south-korea-tightens-rules-on-crypto-lending-platforms/)