South Korea Halts Crypto Lending as Market Leverage Sparks Regulatory Concern

South Korean financial authorities have temporarily suspended new crypto lending services in a direct response to a major liquidation event at a local exchange.

This move highlights growing global concerns over excessive leverage in the digital asset market.

The decision by the country’s Financial Services Commission (FSC) follows a recent incident at Bithumb, where regulators noted that more than 27,000 customers tapped lending services in June.

As market prices swung against them, a full 13% of these users were forced into liquidation.

The authorities stated that this pause will last until formal “Virtual Asset Rental Service Guidelines” can be prepared. They justified the action by noting that “user protection devices… are insufficient” and that there were “concerns about damage to a healthy trading order.”

“Directionally it signals tighter oversight of leverage and retail risk rather than a permanent ban,” Luke, co-founder of Layer-1 network Mitosis, told Decrypt about the suspension.

This pause is “a signal that the government has identified they must provide further regulatory clarity to best protect investors,” Austin King, co-Founder of Ethereum based layer-1 network Omni Network, told Decrypt.

King believes it is “not scrutiny at all,” but rather a government acknowledging its own “insufficient regulatory clarity” and creating “clear rules of the road.”

This incident is a micro-level example of a macro-level trend.

According to a recent report by Galaxy Digital, leverage has been building across the crypto ecosystem, particularly since Bitcoin’s all-time high in August.

The report found that the combined value of outstanding crypto-collateralized borrows across both centralized and decentralized projects reached an all-time high of $44.25 billion, a nearly 30% increase from the previous quarter.

On-chain lending grew by 42% to $26.5 billion, while open borrows on centralized platforms expanded by 14.66% to $17.78 billion.

The Bitfinex analysts further highlight this growing fragility, noting that total liquidations have remained elevated, with average daily liquidations exceeding $350 million over the past 30 days.

Coinalyze data shows more than $3 billion worth of positions have been liquidated in August so far, with an overwhelming contribution coming from short sellers.

“This tracks a wider pattern,” Luke added, placing South Korea’s move into global context by mentioning MiCA in Europe and recent regulatory developments in the U.S.

“The ratio of altcoin liquidations to BTC liquidations has surged to historically elevated levels,” Bitfinex’s July report stated.

The build-up in leverage over the past month, particularly in the altcoin segment, suggests a return of speculative enthusiasm. It indicates that the crypto market is entering a more fragile phase with a heightened risk of liquidations.

This, according to Austin King, is precisely why South Korea’s swift action serves as a clear regulatory warning, providing a necessary “constraint on the max amount of leverage offered on derivative products” and creating a blueprint for other nations to follow.