South Korea halts new crypto lending services, citing investor risks and regulatory gaps.
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South Korea Halts New Crypto Lending Services
In a decisive move to address mounting investor risks, South Korea’s top financial regulator, the Financial Services Commission (FSC), has ordered cryptocurrency exchanges to suspend new digital asset lending services. This decision comes as thousands of users face forced liquidations, emphasizing the urgent need for a comprehensive regulatory framework.
Regulatory Actions and Investor Protection
Related: Unfolding the Crypto Market Scenario in South Korea: A Comprehensive Analysis
The FSC’s directive, issued on Tuesday, mandates exchanges to cease offering new crypto lending services until detailed guidelines are established. Existing contracts, including those related to repayments and maturity extensions, are still permitted. The regulator’s action underscores a growing concern over the unregulated nature of crypto lending in the country.
According to an official announcement by the FSC, a joint task force with the Financial Supervisory Service (FSS) has been formed to develop regulatory guidelines. These are expected to include leverage limits, user eligibility criteria, and risk disclosures for virtual asset lending activities. The FSC has committed to conducting on-site inspections and taking supervisory actions against non-compliant platforms.
Impact of Forced Liquidations
The decision to suspend new lending services follows reports of significant user losses. One unnamed exchange reportedly attracted approximately 27,600 users within a month of launching its lending service in mid-June, handling a volume of around 1.5 trillion Korean won (approximately $1.1 billion). Alarmingly, about 13% of these users, or 3,635 people, experienced forced liquidations as their crypto holdings depreciated.
Additionally, the FSC highlighted issues with two companies offering Tether (USDT) lending services, which led to a surge in selling volume and an unusual decline in USDT prices. The regulator warned that continuing new lending operations without adequate safeguards could further jeopardize investor funds.
Crypto Lending: A Regulatory Gray Area
Related: South Korea Aims to Implement Cryptocurrency Tax by 2025
Despite South Korea’s efforts to regulate virtual asset service providers (VASPs) since 2020, including Anti-Money Laundering (AML) and Travel Rule mandates, crypto lending remains a largely unregulated sector. The 2023 Virtual Asset User Protection Act, which penalizes unfair activities like market manipulation, has not yet extended to encompass crypto lending.
This regulatory gap has left crypto lending in a legal gray zone, operating without clear frameworks or licensing requirements. The FSC’s recent actions highlight the necessity for a structured approach to safeguard investors and stabilize the market.
For more information on the regulatory developments in South Korea, you can visit the Financial Services Commission’s official website. Additionally, recent updates on the regulatory landscape can be found at Reuters and BBC News.
Michael has been a vital voice in crypto security, focusing on blockchain vulnerabilities and emerging technologies. With a background in cybersecurity and fintech, he ensures our readers stay informed on safeguarding their assets while exploring new opportunities in the crypto space.
