South Korea shields retail investors with strict crypto lending rules

South Korea has introduced stringent regulations for cryptocurrency lending services, capping interest rates at 20% and prohibiting leveraged lending that exceeds collateral value. The Financial Services Commission (FSC), in collaboration with the Financial Supervisory Service, issued a new guideline on September 5 aimed at curbing excessive leverage and protecting retail investors in the volatile crypto market. The measure also mandates that lending services be restricted to cryptocurrencies ranked within the top 20 by market capitalization or those traded on at least three licensed local exchanges.

The guideline outlines several key restrictions. It prohibits so-called “cash-equivalent lending,” where users repay borrowed tokens at their original value in local currency regardless of price fluctuations. Additionally, exchanges must set lending limits based on user experience and trading history, ranging from 30 million won to 70 million won. Companies offering these services are required to use their own capital and are prohibited from circumventing the rules via third-party arrangements [3].

To further safeguard investors, the FSC mandates that new users complete online training and pass a suitability test administered by the Digital Asset Exchange Alliance (DAXA), an industry body formed by major exchanges in compliance with local regulations. Users must also be notified in advance if they are at risk of liquidation. The guideline emphasizes transparency by requiring real-time or monthly disclosures on key metrics such as fee structures, lending volumes by token, and liquidation risks [1].

The new rules come in response to a surge in lending service launches by major exchanges such as Upbit and Bithumb, which had previously allowed users to borrow up to four times the value of their holdings or up to 80% of deposits in crypto or won. These aggressive lending products had driven up fees and enabled short-selling strategies, raising concerns among regulators about speculative trading and potential financial instability [3].

The FSC emphasized that the guidelines will initially operate as a self-regulatory measure but will eventually be codified into law based on the outcomes of their implementation. The initiative aligns with global regulatory trends aimed at bringing clarity and oversight to the rapidly evolving virtual asset lending sector [1]. The FSC stated that the Digital Asset Exchange Alliance will oversee the enforcement of these rules, ensuring compliance with local regulatory standards [1].

The introduction of these regulations marks a significant shift in South Korea’s approach to managing crypto market risks, particularly for retail investors. The FSC highlighted that the guideline addresses the lack of clear rules for virtual asset lending and strengthens investor protection. The new framework reflects a broader effort to balance innovation with consumer safety in the digital finance landscape [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] Korea bans leveraged lending in crypto sphere (https://koreajoongangdaily.joins.com/news/2025-09-05/business/finance/Korea-bans-leveraged-lending-in-crypto-sphere/2392535)