South Korea’s Regulatory Move on Crypto Lending
In a significant regulatory move aimed at curbing high-risk lending in the cryptocurrency space, South Korea’s Financial Services Commission (FSC) has mandated local exchanges to cease all crypto-related lending activities. This directive, which takes immediate effect, will remain in force until a comprehensive regulatory framework is put in place to safeguard investors and stabilize the market.
Prohibition of Lending Services
The FSC announced on Tuesday that it has provided administrative guidance to exchanges, prohibiting them from offering services that allow customers to borrow against their cryptocurrency holdings or fiat currency deposits. This comes as the popularity of crypto lending surged earlier this summer, with platforms like Upbit and Bithumb launching products that permitted users to borrow significant amounts based on their deposited assets.
For instance, Upbit rolled out a lending service allowing users to borrow up to 80% of their deposits in either digital currencies or Korean won, using collateral such as Bitcoin, Tether (USDT), and XRP. Meanwhile, Bithumb introduced a similar offering that permitted loans up to four times the value of a borrower’s holdings. These offerings appeared to coincide with legislative efforts to introduce a Digital Asset Basic Act, which aims to regulate these lending practices officially.
Concerns Over Market Volatility
However, the FSC had previously raised concerns about these lending products operating in a regulatory gray area, highlighting their associated risks. In a recent statement, the regulatory body revealed that approximately 27,600 investors had borrowed a total of 1.5 trillion won (approximately $1.1 billion) within the first month of one lending service’s launch. Market volatility led to about 13% of these borrowers facing liquidation, indicating the precarious nature of such lending activities. The regulator also noted a peculiar sell-off in USDT, which disrupted stablecoin prices on domestic platforms.
Commitment to User Protection
The FSC has reiterated its commitment to establishing clear guidelines for digital asset lending, stating, “We will proceed promptly to draft rules aimed at protecting users while ensuring market stability.”
It also clarified that existing loans can still be repaid or extended under current agreements. Exchanges that do not adhere to the suspension could be subject to on-site inspections.
Broader Context of Regulatory Changes
Both Upbit and Bithumb had previously paused their lending operations in July but resumed under stricter guidelines before this new enforcement. The regulatory crackdown occurs within a broader context of South Korea’s gradual shift towards embracing regulated cryptocurrency activities, including plans for institutional trading and the potential approval of the nation’s first spot crypto exchange-traded funds (ETFs). Additionally, the administration under President Lee Jae Myung is developing a framework for stablecoins linked to the Korean won, indicating a shift towards a more accommodating stance in digital finance, despite the current lending curbs.
Growing Interest in Secure Storage Solutions
Furthermore, there’s growing interest in secure cryptocurrency storage solutions, as evidenced by Dunamu’s recent introduction of a custody service for corporate clients, aimed at providing protection from cyber threats by storing digital assets in offline cold wallets.
