South Korea’s Financial Regulatory Shift in Crypto Lending
South Korea’s financial oversight body has taken significant action by mandating a halt to all cryptocurrency lending activities on local exchanges. This decision arises from the rapid expansion of these lending products, which, according to officials, lack sufficient regulatory frameworks and present potential risks to the financial ecosystem.
Immediate Suspension of Crypto Lending Activities
The Financial Services Commission (FSC) has issued immediate administrative guidance to enforce this suspension, effective until comprehensive lending regulations are established. This directive requires exchanges to cease services that enable users to borrow against cryptocurrency or fiat deposits. While existing loans remain unaffected, borrowers have the option to repay or extend their loans under current agreements. The measure is administrative in nature and not a criminal prohibition; however, exchanges that do not comply may be subject to on-site inspections by regulatory authorities.
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Rapid Growth and Significant Lending Volumes
The crypto lending market witnessed explosive growth following the introduction of new programs. Upbit, for instance, allowed customers to borrow up to 80% of their deposit value, using cryptocurrencies such as USDT, Bitcoin, and XRP as collateral. Similarly, Bithumb offered loans up to four times a customer’s holdings, inspiring other platforms to follow suit. In its initial month, one company attracted approximately 27,600 investors, resulting in loans amounting to 1.5 trillion won (around $1.1 billion). Market fluctuations led to the liquidation of about 13% of these borrowers, as reported by the FSC.
Market Impact and Regulatory Concerns
The intense lending activity led to an unusual sell-off in USDT, temporarily affecting stablecoin prices on some South Korean exchanges. The combination of forced liquidations and a surge in sell-offs heightened concerns among regulators. The FSC identified this pattern of extensive borrowing intertwined with market volatility as a systemic risk.
Exchanges Adjust as Regulatory Frameworks Emerge
Both Upbit and Bithumb had previously paused their lending services in July, with Bithumb resuming under more stringent conditions prior to the new suspension. Industry participants are now bracing for a more regulated environment. Dunamu, the operator of Upbit, has introduced a custody service that employs cold wallets to secure assets for corporate and institutional clients. Additionally, the ruling party is advocating for the Digital Asset Basic Act, a proposal intended to permit lending services within exchange operations once suitable regulations are established.
Developing a Regulatory Framework for Secure Crypto Lending
Regulators are committed to expediting the development of a clear regulatory framework for digital asset lending, aiming to safeguard users and stabilize markets. Concurrently, South Korea is easing other restrictions by paving the way for the country’s inaugural spot crypto ETFs and advancing a won-pegged stablecoin framework. These initiatives reflect an effort to foster safer crypto access while mitigating the risks associated with more volatile retail products.
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