In a significant move for the cryptocurrency landscape, South Korea’s financial watchdog has implemented a ban on crypto lending practices across local exchanges. This decision emerges from concerns surrounding the rapid growth of these financial products, which currently operate without adequate regulations.
The Financial Services Commission (FSC) has issued administrative directives that take effect immediately and will remain until comprehensive lending regulations are established.
Regulatory Actions Against Crypto Lending
The FSC’s directive requires all exchanges to halt services that enable users to borrow against either cryptocurrency or fiat currency deposits. Notably, existing loans are unaffected, allowing borrowers to either repay or extend their agreements under their current terms.
While this action is administrative rather than criminal, platforms that disregard the order could face significant scrutiny, including potential inspections by regulatory bodies.
The regulatory landscape for crypto is changing rapidly, reflecting the need for better consumer protection in digital finance.
— Crypto Insights (@CryptoInsights) October 4, 2023
Surge in Lending Practices
Reports indicate a dramatic increase in lending services since early July. For instance, Upbit initiated a program that allowed clients to borrow up to 80% of their deposit value, using various cryptocurrencies as collateral.
Likewise, competitor Bithumb offered loans that were as much as four times a customer’s holdings, signaling a rapid adoption rate among local exchanges.
In just one month, one platform reported attracting around 27,600 investors who borrowed approximately 1.5 trillion won (about $1.1 billion). However, due to market fluctuations, around 13% of these borrowers faced liquidation risks, as noted by the FSC.
Market Volatility and Liquidation Concerns
There have been concerning reports of an unusual sell-off in USDT, directly linked to the recent surge in lending activities. This triggered temporary instability in stablecoin prices across various South Korean platforms.
Such forced liquidations combined with a sudden flood of sell orders can exacerbate losses for everyday users. This scenario has caught the attention of regulators, who cite the combination of high borrowing rates and market volatility as a potential systemic risk.
Exchanges Adjusting to Regulatory Changes
Both Upbit and Bithumb had previously halted their lending services in July, with Bithumb temporarily reinstating under stricter regulations prior to this new suspension.
Simultaneously, industry players are proactively adjusting to the regulatory environment. For instance, Dunamu, the operator of Upbit, has introduced a custody service aimed at safeguarding assets in cold wallets for institutional and corporate clients.
Moreover, discussions are ongoing about the ruling party’s proposed Digital Asset Basic Act, which aims to formally integrate lending services into exchange operations, provided that comprehensive regulations are established first.
Developing Clear Regulations and New Opportunities
Authorities have vowed to expedite the creation of a comprehensive regulatory framework for digital asset lending, prioritizing user protection and market stability.
Additionally, South Korea is seemingly easing certain regulatory constraints, paving the way for the nation’s first spot cryptocurrency ETFs and developing a framework for won-pegged stablecoins. This indicates a balanced approach, where regulators seek to encourage safer, more accessible forms of cryptocurrency engagement while mitigating risks linked to high-stakes retail products.
Image credits: Verdict, data sourced from TradingView
