Concerns Over New Crypto Services in South Korea
In recent developments, South Korea’s financial regulatory authorities have expressed concerns regarding new crypto lending and margin trading services introduced by major exchanges, Upbit and Bithumb. Both platforms have launched products that permit users to trade with high leverage, prompting alarms about potential investor exploitation and legal ambiguities in a landscape where consumer protections are still evolving.
Regulatory Meetings and Responses
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) convened a meeting with executives from the country’s five largest crypto exchanges last Friday to discuss these issues, as reported by Korea JoongAng Daily. This warning follows Bithumb’s initiation of a new lending feature on July 4, which enables clients to borrow either digital assets or fiat currency, using crypto as collateral with leverage peaking at four times across ten cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT). On the same day, Upbit presented a similar offering, although it was limited to Bitcoin, XRP, and Tether.
These offerings allow traders to short-sell cryptocurrencies by utilizing borrowed capital—a practice that alarms regulators who perceive it as inherently risky, akin to trading strategies that are generally forbidden in traditional financial realms. Responding to the backlash, Upbit ceased operations on its Tether lending feature on Monday, citing concerns it may fall under Korea’s stricter lending regulations. Meanwhile, Bithumb adjusted its product’s structure on Tuesday while maintaining its contentious fourfold leverage.
Potential Regulatory Classifications
According to Ben Ko, CEO and co-founder of Catalyze Research, regulators might classify stablecoin lending as ‘consumer lending’ due to its interest-bearing nature, resulting in its potential inclusion under the Lending Business Act. Ko pointed out that segments of South Korea’s cryptocurrency ecosystem may be functioning outside the standard financial risk management protocols typical of conventional markets.
Future Regulatory Actions
In order to address these emerging risks, the FSC and FSS are establishing a joint task force with exchanges aimed at formulating self-regulatory guidelines. However, Ko warns that enforcing stricter domestic regulations might drive consumers to international platforms, thereby diminishing South Korea’s authority in shaping its crypto landscape and ensuring investor safety. Such a shift could not only weaken local regulatory frameworks but also expose users to platforms with less stringent compliance, heightening the dangers of fraud and financial loss.
Broader Regulatory Transformations
The increased scrutiny on crypto lending coincides with broader regulatory transformations in South Korea’s cryptocurrency sector. Just this past week, the Bank of Korea rebranded its Digital Currency Research Lab to the Digital Currency Lab, emphasizing a proactive stance in regulating crypto markets rather than confining itself to research activities. Meanwhile, the FSC is contemplating the approval of spot crypto ETFs by late 2025, as the central bank investigates the implications of deposit tokens on public blockchains, cautioning that unregulated stablecoin usage could threaten monetary sovereignty.
