South Korea's top financial regulator has ordered cryptocurrency exchanges to suspend new digital asset lending services due to increased risks, stating that clear rules must be established.
The Financial Services Commission (FSC) of South Korea stated on Tuesday that it has sent a letter to exchanges demanding a suspension of new lending services until guidelines are completed. Existing contracts such as repayments and extensions are still allowed.
On July 31, the FSC and the Financial Supervisory Service (FSS) announced the establishment of a joint working group to develop a regulatory framework for cryptocurrency lending. The guidelines will include regulatory requirements such as leverage limits, user qualifications, and risk disclosures.
The FSC stated that it will conduct on-site inspections and supervisory actions against non-compliant platforms.
Forced liquidations highlight the need for regulation
This move comes in response to user loss reports, which include thousands of forced liquidations resulting from lending programs operated by exchanges.
The FSC noted that an anonymous exchange attracted about 27,600 users within a month after launching lending services in mid-June, with trading volume reaching approximately 15 trillion won (about 1.1 billion USD). About 13% (i.e., 3,635 people) of users were forced to liquidate due to the decline in the value of cryptocurrency assets.
The FSC also pointed out that two companies offering Tether (USDT) lending services triggered a surge in sell-offs and an abnormal drop in USDT prices. The agency warned that continuing to launch new lending businesses without safety measures would further harm investor funds.
Regulatory dilemma in South Korea's cryptocurrency lending sector
Since 2020, South Korea has laid the foundation for a regulatory framework for virtual asset service providers (VASP), including revised specific financial transaction information reporting and anti-money laundering (AML) and travel rules under the law.
In 2023, the country's (Virtual Asset User Protection Law) came into effect, providing a legal basis for penalties against unfair activities such as market manipulation and improper management of user deposits. However, cryptocurrency lending remains in a regulatory gray area, lacking a clear regulatory framework or licensing system.