South Korea Puts Emergency Stop on Exchange-Based Crypto Loans After 13% of Borrowers Face Liquidation in Volatile Market

South Korea Forces Halt on Crypto Lending After $1.1 Billion Borrowed in First Month

South Korea’s Financial Services Commission (FSC) has ordered all domestic cryptocurrency exchanges to immediately suspend their crypto lending services.

The directive affects leading platforms such as Upbit and Bithumb and aims to protect retail investors from risky lending practices amid rapid market expansion.

The FSC warned that the services operate in a “legal gray area” and pose a high risk of user losses.

Rapid Borrowing Sparks Market Alarm

Crypto lending grew swiftly after exchanges introduced leveraged products, attracting approximately 27,600 investors who borrowed around $1.1 billion (₩1.5 trillion) within the first month.

About 13% of these borrowers were forced into liquidation as volatile price swings affected their positions.

The sudden surge in lending activity also disrupted local markets, particularly when Tether (USDT) lending caused its price to fall sharply, creating unusual trading patterns and arbitrage opportunities between South Korean and international exchanges.

How Did Exchanges Respond to Regulatory Pressure?

Prior to the FSC’s formal order, major exchanges had already taken preemptive steps.

Upbit allowed borrowing against Korean won deposits and digital assets in July, while Bithumb initially offered leverage of up to four times collateral value.

The latter voluntarily reduced its leverage to 2X in early August, signalling growing caution.

Despite these measures, the FSC’s directive enforces a blanket suspension until formal regulatory guidelines are introduced.

Existing lending contracts will continue, allowing users to repay or extend loans, while new lending is prohibited.

Why Are Regulators Stepping In?

The FSC cited growing investor risk and market instability as the primary reasons for intervention.

Officials noted that rapid adoption of leveraged lending mirrored trends seen in DeFi platforms abroad, with exchanges effectively acting as local liquidity hubs.

The FSC said,

“The services exist in a legal gray area and pose a high risk of user losses.”

Authorities also plan on-site inspections to ensure compliance and prevent further market disruption.

South Korea’s Broader Crypto Strategy

The lending freeze comes as the country moves cautiously toward formalising cryptocurrency regulations.

President Lee Jae-Myung’s administration is preparing to approve the nation’s first spot crypto ETFs, gradually lift restrictions on institutional trading, and establish a local stablecoin market.

South Korean exchanges continue to prioritise selective assets, with XRP and certain meme tokens seeing significant local trading activity.

Analysts note that while blue-chip coins like BTC and ETH maintain smaller shares of domestic trading, the introduction of local stablecoins may shift liquidity away from the Korean won.

Is the Pause Temporary or Permanent?

While the halt is temporary, it reflects a careful approach to balancing innovation with investor protection.

Exchanges may resume lending once comprehensive guidelines are issued, but for now, the move represents a clear signal that regulators are prioritising market stability and consumer safety over rapid product expansion.