South Korea’s top financial regulator has taken a significant step by ordering crypto exchanges to halt new digital asset lending services. This decision stems from growing concerns over potential risks and a pronounced need for distinct regulatory standards.
In a statement released on Tuesday, the Financial Services Commission (FSC) disclosed that it had dispatched letters to exchanges, urging the cessation of new crypto lending activities until comprehensive guidelines are established. However, the FSC clarified that existing contracts, including those concerning repayments and maturity extensions, will remain unaffected.
Regulatory Framework Underway
On July 31, the FSC, alongside the Financial Supervisory Service (FSS), declared the creation of a joint task force dedicated to formulating a regulatory framework specifically for crypto lending. These anticipated guidelines aim to address various aspects, including leverage limits, user eligibility, and risk disclosures pertinent to virtual asset lending activities.
To ensure adherence, the FSC has announced plans to conduct on-site inspections and will not hesitate to take supervisory actions against platforms that fail to comply with these directives.
Forced Liquidations Highlight Urgent Need for Clear Rules
The FSC’s proactive measures come in the wake of reports of substantial user losses, particularly thousands of forced liquidations within exchange-operated lending programs.
In a notable instance, an undisclosed exchange reportedly attracted approximately 27,600 users within a month of launching its lending service in mid-June. The platform witnessed a significant volume of about 1.5 trillion Korean won ($1.1 billion). Alarmingly, around 13% of these users, equating to 3,635 individuals, experienced forced liquidations as the value of their crypto positions depreciated.
Additionally, the FSC cited concerns over two companies offering Tether (USDT) lending services, which led to a surge in selling volumes and a peculiar drop in USDT prices. The agency warned that continuing new lending operations without appropriate safeguards could further jeopardize investor funds.
Crypto Lending: A Gray Area in South Korea
Since 2020, South Korea has been proactively establishing foundational regulatory structures for virtual asset service providers (VASPs). This includes mandates related to Anti-Money Laundering (AML) and the Travel Rule under the revised Act on Reporting and Using Specified Financial Transaction Information.
In 2023, the nation implemented the Virtual Asset User Protection Act, providing a legal framework to penalize unfair practices such as market manipulation and mishandling of user deposits.
Despite these strides, crypto lending continues to exist in a legal gray area, operating without explicit regulatory frameworks or a formal licensing regime. This underscores the urgency and importance of the ongoing efforts to establish clear guidelines.
For further details, please visit the original article on Cointelegraph: South Korea Crypto Lending Ban Guidelines
