South Korea Unveils New Crypto Lending Regulations for Investor Protection & Market Stability

South Korea has unveiled a comprehensive new regulatory framework for its rapidly expanding cryptocurrency lending sector, signaling a proactive stance by financial authorities to mitigate systemic risks and enhance investor safeguards. The stringent guidelines, developed by key financial bodies, aim to inject stability into a market previously characterized by rapid growth and significant, often unprotected, investor exposure.

The impetus for these new measures stems from a recognized “regulatory vacuum” that authorities believe has contributed to substantial investor losses. An official from the Financial Services Commission (FSC) underscored the inevitability of investor damage if high-risk lending services continue to proliferate without adequate oversight. This intervention follows reports of widespread user losses, including thousands of forced liquidations on exchange-run lending programs. For instance, one platform reportedly amassed 27,000 users in a single month, processing 1.5 trillion Korean won ($1.1 billion) in volume, with approximately 13% of its users experiencing forced liquidations as asset values declined.

• South Korea has introduced a comprehensive new regulatory framework for its cryptocurrency lending sector.
• The guidelines aim to mitigate systemic risks, enhance investor safeguards, and inject market stability.
• This intervention addresses a “regulatory vacuum” identified as a cause of significant investor losses.
• Authorities cite widespread user losses, including thousands of forced liquidations on lending platforms.
• One platform, for example, reported 13% of its users experiencing forced liquidations on substantial volumes.

Key Regulatory Pillars for Crypto Lending

The new self-regulatory guidelines, a collaborative effort between the Financial Supervisory Service (FSS) and the Digital Asset Exchange Association (DAXA), are structured around three core pillars: service scope restrictions, robust user protection, and market stability.

Service Scope Limitations

The guidelines explicitly prohibit leveraged lending that exceeds the collateral value and disallow lending in Korean won. Furthermore, exchanges must utilize their own assets for lending operations, and indirect lending through third-party consignment or collaboration is strictly forbidden. This aims to prevent unchecked risk-taking and ensure transparency in asset backing.

Enhanced User Protection

First-time users of crypto lending services will now be mandated to complete DAXA-sponsored online training and aptitude tests. Lending limits, ranging from 30 million to 70 million won, will be applied based on a user’s trading experience and history. Crucially, in scenarios where forced liquidation is anticipated, prior notice must be given to the user, who will also be permitted to provide additional collateral to prevent liquidation. Commission rates are capped at 20% per annum, and comprehensive disclosure of loan status by product, including instances of forced liquidation, is now mandatory.

Market Stability Measures

To prevent excessive market volatility, the range of assets eligible for lending is restricted to the top 20 by market capitalization or those listed on three or more Korean Won Exchanges. Assets subject to trading restrictions or suspected of unusual trading activity will be excluded. Additionally, platforms are required to implement robust internal control mechanisms to prevent undue price fluctuations caused by concentrated holdings in specific assets.

The introduction of these guidelines follows a period of heightened scrutiny. Financial authorities had previously requested a temporary halt to virtual asset lending services and, in July, the FSC and FSS formed a joint task force specifically to develop this regulatory framework. The FSC has indicated its intention to conduct on-site inspections and impose supervisory actions on platforms found to be non-compliant, underscoring the seriousness of these new directives. This move represents a significant step towards institutionalizing and de-risking the digital asset lending ecosystem in South Korea, aligning it more closely with traditional financial market standards.