South Korea’s Financial Services Commission (FSC) has ordered local crypto exchanges to temporarily halt their crypto lending services, citing legal uncertainty and potential risks to investors.
In a translated press release, the FSC said it has sent notices to all domestic exchanges, requiring them to suspend lending operations effective immediately. The regulator described crypto lending as being in a “legal gray area,” with concerns that the service could expose users to fraud and sudden losses.
What Are Crypto Lending Services?
Crypto lending, which only debuted in South Korea this year, allows users to borrow Korean won or digital assets by putting up crypto as collateral. Leading exchanges Upbit and Bithumb were among the first to roll out such products, quickly attracting significant user demand.
But regulators have been cautious. In late July, the FSC urged exchanges to reassess their lending operations, warning that the services carried serious risks of abuse. Following this, both Upbit and Bithumb temporarily suspended lending. Bithumb later resumed under stricter internal rules, though those, too, will now be paused under the latest directive.
Why the FSC Stepped In
The FSC pointed to rapid growth in the sector as a red flag. According to its data, in the first month after a digital asset firm introduced lending, 27,600 investors borrowed about 1.5 trillion won ($1.1 billion). Volatility forced 13% of them into liquidation, underscoring the risks of such products in a highly unpredictable market.
The regulator also highlighted disruptions caused by Tether (USDT) lending, which led to sharp sell-offs and sudden price swings on Korean platforms.
Until new guidelines are in place, borrowers will still be allowed to extend loan terms or repay existing loans, but no new lending activity will be permitted. The FSC also warned it will carry out on-site inspections of any exchange that fails to comply.
Next Steps and Market Impact
The suspension is described as a temporary measure while the FSC drafts clear guidelines to govern crypto lending. These rules will aim to safeguard investors, prevent fraud, and bring more stability to the sector.
South Korea’s broader stance on crypto has been shifting in recent years. Since President Lee Jae-Myung took office, the country has adopted a more pro-crypto approach, echoing trends in the U.S. under Trump. Lee has pledged to support won-backed digital assets and explore crypto-backed ETFs, signaling that innovation will remain part of the agenda, albeit under tighter regulation.
