South Korea’s financial watchdog has ordered local crypto exchanges to halt lending services, citing investor risks and regulatory uncertainty.
South Korea’s Financial Services Commission (FSC) has stepped in to suspend crypto lending services across domestic exchanges. The order, issued Monday, requires platforms to pause lending activities starting Tuesday until new regulations are introduced.
The regulator explained that crypto-backed lending products are operating without clear legal backing. Officials also highlighted significant investor risks, including forced liquidations and sudden market disruptions.
Rapid Growth of Lending Products Raised Alarms
The suspension follows a surge of activity in the market. Earlier in July, Upbit introduced a product allowing users to borrow up to 80% of their assets, using popular cryptocurrencies such as Bitcoin, XRP, and Tether (USDT) as collateral.
Bithumb offered an even more aggressive model, letting clients borrow crypto worth four times their deposits. Several smaller exchanges quickly rolled out similar services, creating what regulators describe as an “unchecked lending boom.”
In just one month, 27,600 investors borrowed a combined 1.5 trillion won ($1.1 billion) through these services, according to the FSC’s official release. The regulator also noted that 13% of borrowers were forced into liquidation as a result of collateral values being eroded by price volatility.
Market Turbulence After USDT Lending
The FSC also flagged unusual price activity linked to USDT-based lending. Shortly after exchanges introduced these products, a sudden flood of sell orders caused Tether’s price to fall abnormally on local platforms.
Stablecoins are typically designed to stay pegged to $1. The drop, therefore, raised concerns about market manipulation and investor confidence. Officials warned that unregulated lending could destabilize markets further if left unchecked.
Previous Warnings Ignored
This latest move comes after repeated caution from the FSC. On July 31, regulators asked exchanges to reevaluate their lending businesses, stressing that such products exist in a legal “gray zone.”
Both Upbit and Bithumb briefly suspended services in response, but Bithumb soon resumed lending under stricter conditions. The FSC’s new directive, however, makes the suspension binding for all exchanges. Non-compliance will trigger on-site inspections and possible sanctions.
New Guidelines in the Works
Despite the suspension, regulators signaled they are not seeking to ban lending permanently. Instead, the FSC plans to introduce a clear regulatory framework for crypto lending.
The guidelines will focus on investor protection and transparency while integrating leveraged lending into the country’s broader digital asset ecosystem. Until then, exchanges are allowed to manage existing contracts, including loan repayments and maturity extensions.
Broader Shift in South Korea’s Crypto Policy
The suspension reflects a wider balancing act in South Korea’s approach to digital assets. While regulators are tightening control over high-risk activities, they are also creating new opportunities.
The government is currently drafting the Digital Asset Basic Act, which may formally authorize lending once safeguards are in place. At the same time, financial authorities are preparing to lift restrictions on institutional crypto trading and to approve the country’s first spot exchange-traded funds (ETFs).
President Lee Jae Myung’s administration has also signaled support for a won-pegged stablecoin market, part of efforts to build a regulated but innovative digital finance ecosystem.
The FSC’s latest intervention highlights South Korea’s cautious yet progressive path toward crypto regulation. The suspension may frustrate exchanges eager to expand services, but it highlights the government’s intent to prevent uncontrolled risks before allowing broader adoption.
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