South Korea Suspends Crypto Lending Services After $1.1B in Borrowing Triggers Market Disruption

South Korea's Financial Services Commission has ordered domestic cryptocurrency exchanges to halt lending services immediately following market disruptions caused by rapid adoption of leveraged trading products that attracted $1.1 billion in borrowing within their first month, according to The Block.

The FSC issued administrative guidance Tuesday requiring exchanges including Upbit and Bithumb to suspend crypto lending operations until formal regulatory guidelines are established. The move comes after approximately 27,600 investors borrowed 1.5 trillion won ($1.1 billion) through these services, with 13% forced into liquidation due to price volatility, the publication reported.

Major exchanges had rushed to launch lending products following the ruling party's proposed Digital Asset Basic Act, which would formally permit such services. Upbit introduced borrowing against Korean won deposits and digital assets in July, while Bithumb offered leverage of up to four times collateral value before both platforms suspended operations last month amid regulatory pressure.

The rapid expansion of crypto lending created unexpected market stress, according to the FSC. USDT lending services triggered unusual sell pressure that caused the stablecoin's price to drop significantly on domestic exchanges, disrupting normal trading patterns and creating arbitrage opportunities between Korean and international markets.

"The services exist in a legal gray area and pose a high risk of user losses," the FSC stated , highlighting concerns about investor protection in the nascent lending market.

The temporary ban reflects South Korea's cautious approach to financial innovation despite a broader shift toward crypto-friendly policies. The country is preparing to approve its first spot cryptocurrency ETFs and gradually lifting restrictions on institutional trading as President Lee Jae Myung's administration works to establish a local stablecoin market.

Existing lending contracts will be allowed to mature or be extended while exchanges await new guidelines, which the FSC promises to develop "promptly." The regulator warned of on-site inspections for platforms that fail to comply with the suspension order.