South Korea Cracks Down on Crypto Exchanges, Halts Lending Operations

South Korea Directs Crypto Exchanges To Halt Lending

In the latest development in South Korea’s digital asset landscape, the Financial Services Commission has directed major crypto exchanges to temporarily halt cryptocurrency lending operations. Citing regulatory uncertainty and potential risks, the financial watchdog has implemented restrictions on these platforms until the country introduces clear guidelines.

South Korea’s Crypto Exchanges Face Restrictions

The Financial Services Commission of South Korea has issued an administrative guidance to crypto exchanges, instructing them to halt lending operations. In an effort to curb increasing risks, the regulator has opted to suspend similar operations until clear regulations are put in place. Underscoring the significance of regulatory guidelines, the FSC noted, “We will move swiftly to prepare guidelines to protect users and ensure stability in the market.”

Notably, crypto loan operations enable investors to secure loans by using cryptocurrencies or fiat deposits as collateral. Effective immediately, crypto exchanges are prohibited from offering loans, pending the establishment of new regulations. Non-compliant exchanges will be subject to on-site inspections by the regulator.

Interestingly, this development aligns with South Korea’s vision of establishing a solid regulatory framework to oversee the cryptocurrency industry. The country intends to foster innovation along with guaranteeing investor protection. For instance, in line with global acceptance of stablecoins, South Korea has also introduced a framework for stable tokens.

Crypto Loans Pose Risks

Since early July,  cryptocurrency lending operations have gained significant traction. This program drew considerable interest, especially following the launch of programs by platforms like Upbit, which enable users to borrow up to 80% of their deposited value in Korean won or digital assets, collateralized by USDT, Bitcoin, and XRP.

Following Upbit's lead, Bithumb, a rival exchange, introduced a comparable loan service, allowing customers to borrow up to four times the value of their assets, with other local platforms quickly adopting similar offerings.

However, the increased popularity of cryptocurrency loan program has sparked wider concerns about risks. Last month, the FSC alerted that these services operated under a regulatory gray area, posing significant threats. While 27,600 investors borrowed around 1.5 trillion won ($1.1 billion) in the first month of one company's lending program, market volatility forced about 13% of borrowers into liquidation. Additionally, the FSC noted that the lending services triggered an unusual sell-off in USDT, temporarily disrupting stablecoin pricing on Korean platforms.

Under these regulatory restrictions, both Upbit and Bithumb paused their lending services earlier in July. Though Bithumb suspended these services following the FSC’s warning on July 31, the exchange later resumed them under stricter conditions.