South Korea Tightens Crypto Lending Rules: Leverage Banned
South Korea Bans Leveraged Crypto Lending, Caps Rates
South Korea's Financial Services Commission (FSC) has implemented new regulations for cryptocurrency lending, signaling a stricter approach to the digital asset market. The move aims to protect investors and ensure greater transparency in the burgeoning crypto lending space.
The FSC announced on Friday that it is capping interest rates on crypto loans at 20%. More significantly, the regulator has banned leveraged lending entirely. The new rules also restrict crypto lending to the top 20 tokens by market capitalization or those listed on at least three won-based exchanges.
Key Changes in Crypto Lending Regulations
- Interest Rate Cap: Interest on crypto loans is now capped at 20%.
- Leveraged Lending Ban: Crypto exchanges are prohibited from offering leveraged lending services.
- Asset Restrictions: Lending is limited to the top 20 cryptocurrencies by market cap, or those listed on at least three Korean Won-based exchanges.
These changes follow earlier reports in July indicating that South Korean financial regulators were preparing to release guidelines on cryptocurrency lending services.
Increased Scrutiny and Investor Protection
The FSC stated that the regulatory review was initiated due to the existing lack of specific regulations governing crypto lending. To further safeguard investors, exchanges must now ensure that first-time borrowers complete online training and pass suitability tests administered by the Digital Asset eXchange Alliance (DAXA), a local self-regulatory organization.
Transparency and Fair Practices
The new regulations also mandate increased transparency and fair practices. Exchanges must provide advance notification to users in the event of forced liquidations and allow users to add capital to their positions to avoid liquidation.
Furthermore, exchanges are now required to use their own capital to provide lending services. Indirect lending via third-party collaborations or outsourcing is strictly prohibited to prevent regulatory evasion.
Broader Implications for the Crypto Market
These regulations reflect a growing concern in South Korea regarding the risks associated with crypto. Lee Eok-won, the nominee for chairman of the FSC, has previously expressed skepticism about cryptocurrency, stating that it “has extreme price volatility, lacks monetary function” and has “no intrinsic value.”
Reports from late July also indicated that South Korea's central bank is launching a virtual asset committee to increase market monitoring.
Crypto's Popularity Amidst Regulatory Concerns
Despite the increasing regulatory pressure, cryptocurrency adoption continues to grow in South Korea. Data from March showed that crypto exchange users surpassed 16 million. However, some analysts suggest that this growth is driven by financial desperation among younger generations rather than a fundamental belief in the technology.