South Korea’s Financial Services Commission Halts New Crypto Lending Services
South Korea’s Financial Services Commission (FSC) has issued a directive halting all local cryptocurrency exchanges from launching new lending services. This action is a response to growing investor risks exacerbated by market volatility, particularly following substantial losses linked to the Bithumb exchange, where a surge in liquidations affected over 27,000 users in June.
Existing lending operations may continue; however, any attempts to expand such services will be closely scrutinised, with the possibility of regulatory inspections and enforcement actions. The FSC’s decision underscores the increasing vigilance regulators are adopting in addressing the dynamic landscape of digital assets.
Investor Risks and Market Stability Concerns
The FSC’s intervention is rooted in a commitment to protect investors and maintain market stability. The commission highlighted the volatility of digital asset lending, evidenced by a report indicating that around 13% of Bithumb’s lending users faced liquidation as collateral values plummeted. The scenario exemplifies the risks the FSC believes must be mitigated before any broader acceptance of crypto lending.
The regulatory body noted that, despite the ongoing turbulence in the market, South Korea has been progressively developing a robust regulatory framework for cryptocurrencies since 2020. This includes stringent Anti-Money Laundering (AML) protocols and compliance directives, alongside the 2023 Virtual Asset User Protection Act aiming to safeguard against deposit misuse and market manipulation. Nevertheless, the realm of crypto lending has lingered without official oversight, which the new measures aim to rectify.
In a shifting political landscape, President Lee Jae-myung, representing the Democratic Party, appears to champion pro-crypto reforms, including moving towards the legalisation of domestic stablecoins. Despite this, the FSC is exercising caution, especially following recent instances involving firms offering Tether (USDT) lending services that resulted in significant sell-offs and a sharp decline in USDT’s value.
With these developments, the FSC has signalled a clear stance: expanding lending services without proper safeguards could amplify investor losses and destabilise the market further.
Global Regulatory Trends
This cautious approach aligns with broader global trends where regulatory bodies are tightening controls over digital assets. The U.S. Securities and Exchange Commission (SEC) has similarly halted advancements on various cryptocurrency exchange-traded funds (ETFs), focusing on the review and approval processes for including in-kind redemptions and staking features for Ethereum ETFs.
In summary, while South Korea advances toward a structured legal framework for digital assets, the immediate halt on new lending services reflects an imperative to manage inherent risks. Investors and exchanges may need to prepare for a more regulated environment as the country establishes clear guidelines for crypto lending and related activities in the coming months.
