South Korea orders exchanges to halt crypto lending services

South Korea’s top financial regulator ordered crypto exchanges to suspend new digital asset lending services, citing mounting risks and highlighting the need for clear rules. 

The Financial Services Commission (FSC) said Tuesday that it sent letters to exchanges requesting the suspension of new crypto lending services until it finalizes guidelines. Existing contracts, like repayments and maturity extensions, will still be permitted. 

On July 31, the FSC and the Financial Supervisory Service (FSS) announced they had formed a joint task force to develop a regulatory framework for crypto lending. The guidelines are expected to cover leverage limits, user eligibility and risk disclosures for virtual asset lending activities.

The FSC said it would conduct on-site inspections and take supervisory action against platforms that fail to comply.

Forced liquidations highlight urgent need for clear rules

The move follows reports of widespread user losses, including thousands of forced liquidations in exchange-run lending programs.

One unnamed exchange drew about 27,600 users in a month after launching a lending service in mid-June, the FSC said. The platform recorded about 1.5 trillion Korean won ($1.1 billion) in volume. Of those users, roughly 13% — or 3,635 people — suffered forced liquidations as their crypto positions fell in value.

The FSC also pointed to two companies that offered Tether (USDT) lending services, which triggered a surge in selling volume and an unusual decline in USDT prices. The agency said continuing new lending operations without safeguards could further damage investor funds.

Crypto lending a gray area in South Korea

Since 2020, South Korea has laid foundational regulatory groundwork for virtual asset service providers (VASPs).

This includes Anti-Money Laundering (AML) and Travel Rule mandates under the revised Act on Reporting and Using Specified Financial Transaction Information. 

In 2023, the country’s Virtual Asset User Protection Act came into force, creating a legal basis for penalties against unfair activities like market manipulation and mishandling of user deposits. 

Despite these, crypto lending remained in a legal gray zone, operating without clear regulatory frameworks or a licensing regime.