South Korea’s top financial regulator has ordered all local digital asset exchanges to temporarily suspend their cryptocurrency lending services, citing a lack of clear regulations and high risk to investors.
The Financial Services Commission (FSC) issued the administrative guidance to exchanges today, effectively halting new crypto lending operations until the government establishes a proper regulatory framework. This action comes after a rapid rise in such services, with exchanges like Upbit and Bithumb launching lending products in early July.
These services, which allowed users to borrow cryptocurrencies or Korean won against their deposits, appear to have emerged in anticipation of the proposed Digital Asset Basic Act, a bill that seeks to formalize and allow these very services.
The FSC’s decision was prompted by concerns over significant user losses and market instability. According to the regulator, approximately 27,600 investors borrowed about 1.5 trillion won ($1.1 billion) within the first month of a digital asset company’s lending service launch. However, due to market volatility, 13% of these users were forced to liquidate their positions. The FSC did not name the specific company.
The regulator also noted that the introduction of Tether (USDT) lending services led to a surge in sell orders, causing an unusual drop in the stablecoin’s price and disrupting the market.
While the directive has put an immediate stop to new lending activities, the FSC indicated it is moving toward a more structured approach. The agency stated it will promptly develop comprehensive guidelines to protect users and provide regulatory clarity.
This willingness to create a framework suggests that the regulator may be preparing to formally integrate leveraged lending services into the country’s crypto market. The FSC will permit exchanges to manage existing loan contracts, allowing for repayments and maturity extensions. However, the agency warned it will conduct on-site inspections of any exchange that fails to comply with the new guidance.