South Korea's financial regulators have taken strong action, urgently halting encryption lending services! Over 27,000 users are at risk, with 13% facing liquidation.

The South Korean financial regulator (FSC) officially ordered on Tuesday that all domestic crypto asset exchanges immediately suspend all crypto lending services until a comprehensive regulatory framework is established. This emergency measure aims to curb the rising high-risk lending activities in the digital asset sector. The regulator disclosed shocking data: in just the first month of a certain platform, 27,600 users borrowed a total of 1.5 trillion won (approximately 1.1 billion USD), with 13% of borrowers facing liquidation due to market fluctuations. The FSC pledged to swiftly formulate lending rules to protect users and stabilize the market, while also revealing that South Korea is simultaneously easing institutional trading restrictions and preparing the first batch of spot crypto ETFs, creating a regulatory environment characterized by a "bipolar" situation.

Regulatory Ban Takes Effect Immediately

The South Korean Financial Services Commission (FSC) confirmed on Tuesday that it has issued administrative guidance to domestic crypto asset exchanges, requiring them to immediately suspend all business operations that allow users to use crypto assets or fiat currency deposits as collateral for lending. This ban will remain in effect until new regulations on crypto lending are finalized and implemented.

The lending boom hides huge risks

Since the beginning of July this year, crypto lending services have rapidly gained popularity in South Korea. Leading centralized exchanges (CEX) were the first to launch services that allow users to use USDT, Bitcoin (BTC), or Ripple (XRP) as collateral to borrow up to 80% of the value of their deposits in Korean Won or digital assets. Another competitor quickly followed suit by launching lending products with leverage rates up to 4 times the value of the collateral assets, and other local platforms also rapidly imitated this. It is worth noting that the launch of these products coincides with the ruling party in South Korea proposing the "Basic Law on Digital Assets," which aims to formally authorize exchanges to conduct lending operations. However, the FSC warned last month that such products are in a regulatory gray area and pose significant risks.

Shocking Risk Data

In the latest announcement, FSC disclosed alarming data: in just the first month of a certain company's lending program, approximately 27,600 investors borrowed a total of 1.5 trillion won (approximately 1.1 billion USD). What is even more concerning is that regulators pointed out that due to market fluctuations, about 13% of borrowers (approximately 3,588 people) experienced liquidation. The FSC also specifically emphasized that the lending services triggered an abnormal sell-off of USDT, which once disrupted the stablecoin pricing mechanism on Korean platforms.

New Regulations Formulation and Transition Arrangements

FSC emphasizes that its goal is to establish a clear rulebook for digital asset lending. "We will quickly formulate guidelines to protect users and ensure market stability," the agency stated, adding that existing loans can still be repaid or extended according to the current contracts. For exchanges that do not comply with the suspension order, the FSC will conduct on-site inspections. The two major local CEXs in the country temporarily suspended lending services in July, although one of them had resumed operations with stricter terms before this comprehensive ban.

Dual-track Regulation: Tightening Lending and Easing Institutional Access

The recent crackdown on crypto lending coincides with South Korea's broader shift towards the regulated adoption of Crypto Assets. Authorities are easing restrictions on institutional trading and preparing to approve the country's first Spot crypto currency ETFs. The Yoon Suk-yeol government is also developing a framework for stablecoins pegged to the Korean won, indicating that despite recent tightening of lending regulations, South Korea is adopting a more open strategy towards digital finance. Last week, Dunamu, the largest domestic crypto asset exchange operator in South Korea, launched a new custody service aimed at corporate and institutional clients, reflecting a surge in demand for secure storage solutions after the regulatory approval for investments in virtual assets. This service stores all deposited digital assets in completely offline cold wallets, isolated from network threats, to guard against risks of external intrusions such as cyberattacks.

Conclusion

The urgent suspension of crypto lending services by the South Korea FSC reveals the enormous risk exposure of this business in the absence of regulation, particularly the liquidation issues caused by high leverage. Although it poses a short-term impact on retail lending operations, the simultaneous advancement of spot ETF approvals, stablecoin framework development, and institutional-level custody service growth by regulatory authorities clearly outlines South Korea's strategic path to building a "institution-led, risk-controlled" digital asset market. Whether crypto lending services can be restarted under strict regulations in the future will become an important barometer for observing the maturity of South Korea's digital asset regulation.