tl;dr
South Korea's Financial Services Commission (FSC) has suspended new crypto lending products to protect users and stabilize the market following recent forced liquidations and rising leverage concerns. Existing loans can continue, but no new lending services are allowed until regulatory guidelines ar...
South Korea's Financial Services Commission (FSC) has suspended new crypto lending products in an effort to protect users and stabilize the market. This action follows recent forced liquidations, including a significant $1 billion event triggered by bitcoin’s price drop from $124,000 to $118,000 and increased leverage concerns flagged in a report by Galaxy Digital. The FSC’s directive allows existing loans to continue but prohibits the launch of new lending services until formal regulatory guidelines are established.
At the heart of the issue is the growing use of leverage within crypto markets, which has surged to its highest level since early 2022, with crypto-collateralized loans rising 27% in the second quarter to $53.1 billion. The risks of this leverage became evident when more than 27,000 Bithumb users, who engaged lending services in June, faced a forced liquidation rate of 13% as collateral values fluctuated sharply against their positions. Regulators have warned that failure to comply with the suspensions could lead to on-site inspections and further supervisory actions.
Despite the regulatory crackdown, some analysts argue that shutting down lending products is not the ideal solution. Bradley Park from DNTV Research recommends enhancing risk management through improved user interfaces, better risk disclosures, and more stringent Loan-to-Value (LTV) controls. He emphasizes that most exchange lending uses stablecoins to build short positions, and the primary concern might be market distortions, such as the negative kimchi premium, rather than lending itself. Transparency remains a challenge as well, with Bithumb revealing its lending volumes while Upbit, South Korea’s largest exchange, offers no such data, complicating oversight and systemic risk assessment.
Park suggests that a data-driven, well-informed approach focused on understanding the lending mechanisms and closing transparency gaps would serve users and markets better than blanket restrictions. The FSC’s suspension reflects a cautious regulatory stance amidst rising global crypto leverage and accompanying stress signals such as DeFi liquidity shortages and widening loan rate spreads. As formal guidelines are anticipated in the near future, the debate continues on striking the right balance between risk mitigation and sustaining innovation in crypto lending.