South Korea’s Financial Services Commission (FSC) has issued a directive for all licensed digital asset platforms to halt their crypto lending operations. The pause comes after the rapid growth of lending services, which saw a $1.1 billion boom in just one month. The regulator’s decision comes amid concerns about investor risks, market stability, and the lack of a clear regulatory framework for exchange-backed lending products.
South Korea’s FSC pushes pause on lending
On Tuesday, the Financial Services Commission (FSC) formally instructed South Korea’s licensed exchanges to suspend their crypto lending operations. This decision follows the explosive growth of lending products, which had gained significant popularity in a short span of time, attracting tens of thousands of users. Major exchanges like Upbit and Bithumb had rolled out lending services, offering loans based on crypto deposits like Bitcoin (BTC), Tether (USDT), and XRP.
Upbit’s lending service allowed customers to borrow up to 80% of their collateral’s value, while Bithumb extended loans up to four times the amount. These lending services, viewed as a move toward institutional-grade finance, had been launched in tandem with the South Korean government’s proposal for the Digital Asset Basic Act, which could provide legal clarity for exchange-run lending in the future.
Investor risks and liquidations
The rapid adoption of crypto lending products has raised red flags for regulators. In just one month, around 27,600 investors borrowed 1.5 trillion Korean won ($1.1 billion), highlighting the growing demand for these services. However, sharp market swings led to forced liquidations for approximately 13% of borrowers. The FSC expressed concerns about the potential for significant retail losses, particularly during volatile periods.
Additionally, unusual trading activity was reported in local markets following the launch of USDT lending. A surge of sell orders temporarily disrupted the stablecoin’s peg, signaling that unchecked growth in lending could destabilize both the digital asset markets and the broader financial system. The FSC’s decision to halt lending operations reflects growing concerns about these risks.
Exchanges already pulled back once
This isn’t the first time the FSC has raised concerns over crypto lending. Back in late July, the FSC had asked exchanges to reassess the legality of their lending services, which were operating in a regulatory “gray zone.” As a result, exchanges like Upbit and Bithumb suspended their lending services temporarily. However, Bithumb resumed operations under stricter terms. Tuesday’s order, which applies to all exchanges, forces them to halt lending entirely until a standardized regulatory framework is in place.
Policy direction ahead
Looking ahead, the FSC’s decision aims to buy time for the development of a comprehensive regulatory framework. The pause in crypto lending services will provide the government with space to define rules regarding acceptable collateral assets and how to manage liquidation risks. The Digital Asset Basic Act, which is expected to address these concerns, will likely be a focal point in future debates on the integration of crypto activities into South Korea’s broader financial system.
The regulator’s cautious approach signals that authorities are prioritizing the stability of the market and investor protection before allowing further expansion of lending services.