South Korea Halts New Crypto Lending Amid Regulatory Crackdowns: Reports

In letters sent to exchanges offering lending, the Financial Services Commission (FSC) cited growing risks and the need for clear rules to protect consumers from significant and sudden losses, according to media reports. The FSC also posted an official notice on its web page dated 19 August announcing the new protocol.

The recent decision comes as some Korean users faced forced liquidations in exchange-run lending programs.

Stablecoin uncertainty  

The FSC directly called out Tether, issuer of the USDT stablecoin. USDT currently has a market capitalization exceeding $166 billion per CoinMarketCap. Unusual price declines threatened investor funds.

The regulator is expected to provide guidance on leverage limits, user eligibility, and risk disclosures, and has vowed on-site inspections and supervisory action for noncompliance.

South Korea has moved to significantly build-out a regulatory framework governing digital assets, notably starting in 2020. Regulators have developed substantial anti-money laundering rules while carving out the Virtual Asset Protection Act to provide consumer protection safeguards.

Despite these strides, crypto lending specifically, and the rules governing its use and application has remained in a legal grey area without clear policy guidance.

Regional positioning

The FSC’s actions come as South Korea moves to position itself as a regional crypto hub in Asia, recently inking a deal with one of Vietnam’s largest banks to help establish that country’s first domestic crypto exchange.  

“We need to establish a won-backed stablecoin market to prevent national wealth from leaking overseas.” South Korea’s recently elected president Lee Jae Myung said at a policy discussion in May. He has also championed widespread cryptocurrency adoption and campaigned on a platform supporting digital asset growth.

On 31 July, the FSC said it was also setting up a task force to draft rules for crypto lending. The guidelines are expected to spell out things like leverage limits, who can use the services, and what risks platforms must disclose.