South Korean FSC order suspension of crypto lending services, here’s why

The South Korean Financial Services Commission (FSC) have ordered local crypto exchanges to temporarily halt their crypto lending services until proper guidelines are introduced.

On August 19, the FSC announced in a translated press release that it has sent legal notices to local crypto exchanges, ordering them to halt crypto lending services starting today. This is because the agency believes cryptocurrency lending services are still in a “legal gray area” which could result in user losses.

Crypto lending services are fairly new to the South Korean crypto market, having been introduced just this year by major exchanges like Upbit and Bithumb. These services would allow for users to borrow Korean won or digital assets and use them as collateral.

In late July, the FSC asked local crypto exchanges to reevaluate their lending operations as they believed lending services posed a great risk of being exploited for crypto fraud and could lead to major losses.

As a result, Bithumb and Upbit, two of the largest crypto exchanges in South Korea by trading volume, suspended their lending services last month. Although, Bithumb later resumed its services under stricter regulations.

The suspension of crypto lending services for all crypto exchanges is a temporary solution, enacted just until the financial watchdog establishes guidelines to safeguard crypto lending services and protect customers from associated trading risks.

Before the new rules take effect, the FSC will let borrowers extend their loan terms or make repayments on current lending contracts. At the same time, the agency said it will conduct on-site inspections of exchanges that fail to follow its guidelines.

How big is crypto lending in South Korea?

According to the translated release, the FSC reported that about 27,600 investors borrowed approximately 1.5 trillion won or equal to $1.1 billion in the first month after a digital asset firm launched its lending services. Because of price volatility, 13% of them were forced to liquidate their positions. The agency declined to identify the company.

The FSC also noted that when exchanges started offering USDT (USDT) lending, a wave of sell orders caused the stablecoin’s price to fall sharply on these platforms. This in turn, ended up disrupting the market.

Since President Lee Jae-Myung was sworn into office, South Korea’s stance on crypto have shifted to a more open and pro-crypto approach, mirroring that of the United States under Trump. Lee has vowed to permit crypto assets backed by the Korean won and push for crypto-backed ETFs.