South Korea Imposes a Stop on Cryptocurrency Lending due to Market Leverage Causing Regulatory Anxiety

In a move aimed at enhancing market stability and investor protection, South Korea's Financial Services Commission (FSC) has temporarily suspended new crypto lending services across all domestic exchanges. This decision comes in response to escalating global concerns around excessive leverage and liquidation risks in the cryptocurrency market.

The suspension, effective from August 2025, was prompted by a surge of up to 400% leverage and forced liquidations. Data revealed that 13% of borrowers—about 27,600 investors—were liquidated following a $1.1 billion lending boom within just one month. Major exchanges like Bithumb and Upbit contributed to this lending surge, with Bithumb offering loans worth up to four times the user’s deposit.

Bithumb's aggressive lending model amplified user risk, triggering heightened volatility and increasing the chance of forced liquidations. The FSC's intervention mandated a full halt on new lending products until comprehensive rules are formalized. Bithumb had temporarily paused and then resumed lending with tighter conditions, but the FSC’s intervention necessitated a more stringent halt.

The move aligns with efforts such as the proposed Digital Asset Basic Act in South Korea, which requires stringent capital rules to ensure greater market stability and investor protection. This regulatory framework aims to reduce opacity, impose leverage caps, clarify user eligibility, and mandate risk disclosures for crypto lending services.

While the suspension has already led to a 40% reduction in forced liquidations, critics argue it may stifle innovation and retail risk management in the crypto space. However, the FSC maintains that clear legal guidelines and enhanced supervision are crucial before allowing lending activities to resume to prevent repeat crises.

The suspension signals tighter oversight of leverage and retail risk, according to Luke, co-founder of Layer-1 network Mitosis. Austin King, co-Founder of Ethereum based layer-1 network Omni Network, believes the pause is a signal that the government must provide further regulatory clarity to protect investors. King also believes the suspension is not scrutiny but a government acknowledging its own insufficient regulatory clarity and creating clear rules of the road.

King further believes that South Korea's swift action serves as a clear regulatory warning, providing a necessary "constraint on the max amount of leverage offered on derivative products". This, according to King, creates a blueprint for other nations to follow.

In addition, more than $3 billion worth of positions have been liquidated in August so far, with an overwhelming contribution coming from short sellers. This underscores the need for stricter regulations to protect investors and maintain market stability.

In sum, South Korea’s FSC led a decisive regulatory response to excessive leverage and liquidation risk in its crypto market, exemplified by the Bithumb lending incident, part of a broader trend for stricter oversight worldwide to promote crypto market stability and investor protection.

Summary of key points:

| Aspect | Details | |----------------------------------|----------------------------------------------------------------------------------------------------------| | Regulatory body | South Korea's Financial Services Commission (FSC) | | Action taken | Suspension of new crypto lending products on all domestic exchanges (August 2025) | | Reason | Excessive leverage (up to 400%), forced liquidations (13% of borrowers), legal ambiguity | | Scale | $1.1 billion issued loans in one month, 27,600 borrowers affected | | Exchanges involved | Bithumb (loans up to 4x deposits), Upbit (up to 80% asset borrowing) | | Follow-up measures | Drafting of new lending regulations, including leverage caps, capital requirements, and risk disclosures | | Impact | 40% decrease in forced liquidations, market stability improvement but concerns over innovation limitation | | Global context | Reflects global concerns over crypto leverage; other countries focusing on firm regulations to curb risks |

South Korea Imposes a Stop on Cryptocurrency Lending due to Market Leverage Causing Regulatory Anxiety