South Korea has taken bold action to curb rising risks in its booming digital asset sector. On Tuesday, the country’s top financial regulator ordered local exchanges to suspend new crypto lending programs immediately. The move comes after thousands of retail investors suffered forced liquidations, raising widespread concerns about unchecked lending practices and growing instability in the market.
Forced Liquidations Trigger Urgent Crackdown
The Financial Services Commission (FSC) announced that it issued formal guidance instructing exchanges to halt all new crypto lending services until clear rules are finalised. Existing contracts, such as loan repayments or maturity extensions, are allowed to continue.
The decision follows troubling reports from July that revealed massive user losses. Around 27,600 investors borrowed nearly 1.5 trillion won ($1.1 billion) within a month of one platform launching a lending program. Shockingly, about 13 percent of those borrowers over 3,600 users were liquidated when their collateral values fell.
The regulator also cited unusual activity in the stablecoin market. It pointed to two companies that offered short-term Tether (USDT) lending services, which caused a rare drop in stablecoin prices and triggered abnormal selling pressure. Authorities warned that unchecked lending could further destabilise markets and endanger investor funds.
To Establish Clear Rules
The FSC and the Financial Supervisory Service (FSS) created a joint task force on July 31 to draft a complete regulatory framework for crypto lending. The guidelines will likely cover leverage caps, borrower qualifications, and stricter risk disclosures.
The order takes effect immediately and will remain in place until the new rulebook is published. During this period, exchanges must comply with the suspension or face direct on-site inspections and possible enforcement measures.
FSC officials stressed that swift regulatory action is essential to protect users and preserve market stability. “We will move quickly to draft guidelines that safeguard investors while ensuring healthier industry practices,” the commission stated.
This latest effort shows the regulator’s shift toward closer oversight, particularly as lending services gained enormous traction in only weeks. Without a clear licensing framework, the sector had been operating in a grey zone, exposing both exchanges and users to heightened risks.
Rapid Growth and Weaknesses
The popularity of lending services surged from early July. Industry leader Upbit introduced a program allowing users to borrow up to 80 percent of their holdings, whether in Korean won or digital assets such as Bitcoin, XRP, and Tether. Rival exchange Bithumb launched a more aggressive product, offering loans valued at up to four times customer deposits. Several other platforms soon joined the race.
The timing also coincided with the ruling party’s promotion of the Digital Asset Basic Act, which seeks to provide a legal basis to authorise lending services within the domestic exchange ecosystem.
Yet the rapid growth highlighted both investor appetite and regulatory shortcomings. The FSC had already flagged lending products as risky since they involved untested models without established protections. By July, the risks became visible in the form of widespread liquidations and market anomalies.
As a result, while South Korea’s regulators have cautiously opened doors for other aspects of digital finance, the lending sector is now receiving heightened scrutiny.
Stricter Oversight
The crackdown arrives at a time when South Korea is simultaneously easing several restrictions on crypto trading and investment. Officials are preparing to approve the nation’s first spot cryptocurrency exchange-traded funds (ETFs), targeting growing demand from institutional investors. They are also working on a framework for stablecoins pegged to the Korean won.
Exchanges themselves are adjusting to the regulatory climate. Upbit’s parent company Dunamu recently announced a custody service for corporate and institutional clients. By storing digital assets entirely offline in cold wallets, the company aims to meet rising needs for safer storage options.
This dual approach highlights South Korea’s broader strategy: tighten oversight in risky segments like lending, while encouraging responsible participation in digital markets. President Lee Jae Myung’s administration has emphasised that investor protection remains central to the country’s financial innovation policies.
For now, the suspension of lending services represents a decisive effort to prevent further losses. Regulators hope new guidelines will create a foundation for safer, more sustainable growth in South Korea’s fast-developing crypto sector.
Written By Fazal Ul Vahab C H
