South Korea’s financial regulators have issued warnings regarding the recent launch of crypto lending and margin trading products by top exchanges Upbit and Bithumb. The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have expressed concerns over the legal uncertainties and risks associated with high-leverage trading without proper safeguards.
According to a report by Korea JoongAng Daily, officials from the country’s leading crypto exchanges were summoned by the regulatory authorities to address these concerns. The warnings were prompted by Bithumb’s introduction of a lending service on July 4, offering users the ability to borrow digital assets or fiat currency against crypto collateral with leverage of up to 4x on 10 different tokens, including Bitcoin, Ethereum, and Tether. Upbit followed suit with a similar product limited to Bitcoin, XRP, and Tether.
The regulators are particularly cautious about services that allow users to short-sell crypto using borrowed funds, as they see similarities to risky trading practices that are typically restricted in traditional financial markets. In response to the concerns raised, Upbit decided to halt its Tether lending product, fearing that it could be classified as regulated lending under Korean law. Bithumb made modifications to its structure but retained its controversial 4x leverage feature.
Ben Ko, CEO and co-founder of Catalyze Research, explained that regulators may view stablecoin lending as consumer lending due to its interest-bearing nature, potentially falling under Korea’s Lending Business Act. He also highlighted the need for tighter regulations in the crypto market to prevent users from migrating to offshore platforms with weaker compliance standards, which could expose them to risks of fraud, loss, or abuse.
In a bid to address these issues, the FSC and FSS are planning to collaborate with exchanges to develop voluntary self-regulation policies. However, Ko warned that excessive regulation could drive users to international platforms, undermining Korea’s ability to shape its own crypto market and protect investors.
The crackdown on lending services comes amid a broader regulatory evolution in South Korea’s crypto sector. The Bank of Korea recently rebranded its Digital Currency Research Lab to the Digital Currency Lab, emphasizing its operational role in overseeing crypto markets. Additionally, the FSC is considering the approval of spot crypto ETFs by late 2025, while the central bank is exploring deposit tokens on public blockchains and cautioning against unchecked stablecoin use, which could jeopardize monetary sovereignty.
As South Korea navigates the complexities of regulating the crypto industry, stakeholders are urged to strike a balance between fostering innovation and safeguarding investor interests. With ongoing regulatory developments shaping the landscape, the future of crypto in South Korea remains subject to evolving policies and market dynamics.