South Korea Asks Crypto Exchanges to Halt Lending Services

Financial regulators in South Korea have directed crypto exchanges to pause the launch of any new crypto asset lending services. Officials say the move is necessary to reduce growing risks in the market and to give regulators time to create a clear set of rules.

According to the country’s Financial Services Commission (FSC), letters were recently sent to major crypto trading platforms asking them to stop offering new lending services until formal guidelines are issued. Ongoing agreements, such as repayment schedules or contract extensions, will not be affected.

Last month, the FSC announced the creation of a joint task force with the Financial Supervisory Service (FSS) aimed at designing a crypto lending framework. The forthcoming regulations will address leverage restrictions, investor qualifications, and transparency requirements on potential risks.

The decision follows multiple reports of investor losses tied to crypto exchange lending programs. In one case highlighted by the FSC, an exchange platform launched a lending feature in June that attracted more than 27,000 users in a single month. The service recorded approximately $1.1 billion (1.5 trillion won) in transactions. However, over 3,600 people (13%) were forced into liquidations after the value of their holdings dropped.

The regulator also cited two firms that provided Tether lending products, which created an unusual dip in USDT’s price alongside a sharp increase in trading volume.

The commission warned that continuing lending services without clear protections in place could lead to deeper financial losses for investors. The regulator also stated that it would conduct on-site reviews and take disciplinary steps against platforms that do not follow the order.

South Korea has been building regulatory oversight for digital assets since 2020. Virtual asset service providers (VASPs) are mandated to comply with the country’s Travel Rule and Anti-Money Laundering (AML) standards. However, cryptocurrency lending services have remained unregulated, with no specific licensing system in place.

The regulator’s new decision reflects rising global concerns about leverage in the digital asset sector. A recent report from Galaxy Digital highlighted that the volume of crypto-backed loans rose 27% in the second quarter, reaching $53.1 billion—the highest level since 2022.

Recent market events have only added to regulators’ concerns. Bitcoin’s recent sharp pullback from $124,000 to $118,000 triggered more than $1 billion in liquidations in just a few days. Analysts say that warning signs are appearing across the ecosystem, from widening gaps between OTC dollar borrowing and on-chain lending rates to liquidity shortages in decentralized finance and delays in ETH staking withdrawals.

Periodic pullbacks have characterized the crypto market over the past few years, so entities like Canaan Inc. (NASDAQ: CAN) are unlikely to be unduly fazed by the recent pause in the upward movement of the prices of leading cryptos like Bitcoin.

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