South Korea Directs Crypto Exchanges to Halt Lending

South Korea has once again taken a decisive step in tightening oversight of its digital asset sector. The country’s Financial Services Commission (FSC) has ordered major cryptocurrency exchanges to stop their lending services. The regulator cited potential risks and regulatory uncertainty as the main reasons for the sudden halt. This move signals the government’s intent to build a clear and solid framework before allowing such financial products to continue.

FSC Orders Suspension of Crypto Loans

The FSC issued official guidance to leading crypto exchanges in the country, instructing them to immediately suspend all lending programs. The watchdog explained that the absence of proper rules created significant risks for both exchanges and investors. By halting these activities, the regulator aims to protect market participants while it prepares new policies.

In its statement, the FSC said, “We will move swiftly to prepare guidelines to protect users and ensure stability in the market.” This firm position shows the regulator’s priority: safeguarding investors while ensuring the crypto sector evolves within a structured legal framework.

The halt affects services where users could borrow funds by putting up cryptocurrencies or fiat money as collateral. With the new order in effect, exchanges cannot issue such loans until further notice. The FSC has also warned that exchanges failing to comply will face on-site inspections.

Building a Safer Market

The decision forms part of South Korea’s larger vision to develop a safer and more transparent crypto market. Officials want to promote innovation while also addressing risks that unchecked financial products could bring.

This isn’t the first step the country has taken in this direction. Earlier, South Korea introduced a legal framework for stablecoins, also called stable tokens, in line with global regulatory standards. By doing so, the government demonstrated its willingness to embrace digital finance but only under strict oversight.

Crypto Loan Services Sparked Rapid Growth

Crypto lending had become a fast-growing service in South Korea. Since early July, investors had shown strong demand for these products. Upbit, one of the largest exchanges, launched a program that allowed users to borrow up to 80% of their deposits in either Korean won or cryptocurrencies like Bitcoin, USDT, and XRP.

Bithumb, a rival exchange, quickly followed. It introduced a lending service that allowed users to borrow up to four times the value of their holdings. Other smaller platforms soon adopted similar products.

The popularity was clear. Within the first month of one company’s lending program, 27,600 investors borrowed around 1.5 trillion won (about $1.1 billion). This rapid adoption reflected the strong appetite among retail investors for leverage and alternative funding sources.

Rising Concerns About Risks

However, regulators grew increasingly uneasy. The FSC warned last month that these lending programs operated in a regulatory gray area. Without proper oversight, they could expose investors to sudden losses.

The risks soon became visible. Market volatility forced about 13% of borrowers into liquidation within just a month of launching the services. At the same time, unusual sell-offs in USDT disrupted stablecoin prices on Korean trading platforms. These events underscored the dangers of allowing unregulated loan products to grow unchecked.

Exchanges Forced to Comply

In response to these warnings, Upbit and Bithumb both paused their lending programs earlier in July. Bithumb officially suspended its services on July 31, after the FSC’s alert. Yet the exchange briefly resumed lending under stricter conditions before the new order arrived. Now, with the regulator’s directive, no exchange in South Korea can continue offering these services until formal rules are in place.

What Comes Next

The suspension may frustrate some traders who used these services, but the FSC views it as a necessary step. By pausing crypto lending, regulators gain time to design guidelines that balance innovation with investor protection.

Industry watchers believe the FSC’s actions will lead to stricter but clearer rules, giving exchanges more certainty in the long run. This could help stabilize the sector while also boosting investor confidence.

For now, South Korea’s message is clear: the government wants growth in digital assets, but only under conditions that protect the market and its participants.

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