decrypt.co
South Korea’s financial watchdogs have raised red flags over crypto lending and margin trading products recently launched by Upbit and Bithumb, warning of legal uncertainty and investor risks tied to high-leverage trading in the absence of proper safeguards.
The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) summoned officials from the country’s top five crypto exchanges last Friday to raise concerns, according to Korea JoongAng Daily.
The warnings came after Bithumb launched a lending service on July 4, allowing users to borrow digital assets or fiat against crypto collateral, with up to 4x leverage across 10 tokens including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT).
Upbit followed suit the same day with a similar product limited to Bitcoin, XRP, and Tether.
Crypto operating ‘outside the guardrails’
The intervention targets services that allow users to short-sell crypto through borrowed funds, a practice that has alarmed regulators who see parallels to risky trading mechanisms typically restricted in traditional markets.
In response, Upbit halted its Tether lending product on Monday, concerned it could be classified as regulated lending under Korean law. Bithumb modified its structure on Tuesday but kept its controversial 4x leverage.
"Regulators likely see stablecoin lending as 'consumer lending' because it involves interest-bearing products, which could fall under Korea's Lending Business Act," Ben Ko, CEO and co-founder of Catalyze Research, told Decrypt.
He added that “parts of Korea's crypto market may be operating outside the guardrails typical of traditional financial risk management."
The FSC and FSS plan to establish a joint task force with exchanges to draft voluntary self-regulation policies.
Tighter local rules could end up pushing users to offshore platforms, Ko cautioned, “undermining Korea’s ability to shape its own crypto market and protect its investors.”
"This migration not only reduces the effectiveness of domestic safeguards but also exposes users to platforms with weaker compliance standards, increasing risks of fraud, loss, or abuse,” he added, noting that over time, it could “undermine Korea's ability to shape its own crypto market and protect its investors."
South Korea and crypto
The lending service crackdown comes amid broader regulatory shifts in South Korea's crypto sector.
Just this week, the Bank of Korea renamed its Digital Currency Research Lab to the Digital Currency Lab, stressing its operational role in overseeing crypto markets rather than merely researching them, according to Yonhap News.
As the FSC moves to approve spot crypto ETFs by late 2025, the central bank is also exploring deposit tokens on public blockchains and warned that unchecked stablecoin use could undermine monetary sovereignty.