Abstract
In August 2025, South Korea’s Financial Services Commission (FSC) ordered local cryptocurrency exchanges to suspend new digital asset lending services, citing unmanaged risks, high leverage, investor losses, and a regulatory ‘gray zone’. This decision underscores the complexities and challenges associated with cryptocurrency lending, a rapidly evolving sector within the broader digital asset landscape. This research report delves into the factors leading to South Korea’s regulatory intervention, examines the global regulatory responses to cryptocurrency lending, and provides a comparative analysis of how different jurisdictions are addressing the inherent risks and opportunities presented by this financial innovation.
Many thanks to our sponsor Panxora who helped us prepare this research report.
1. Introduction
Cryptocurrency lending has emerged as a significant component of the digital asset ecosystem, offering users opportunities to earn interest on their holdings or access liquidity without liquidating their positions. However, the rapid growth of this sector has raised concerns among regulators worldwide, particularly regarding the risks associated with high leverage, investor protection, and the lack of clear regulatory frameworks. South Korea’s recent decision to ban new cryptocurrency lending services highlights the pressing need for comprehensive regulatory approaches to address these challenges.
Many thanks to our sponsor Panxora who helped us prepare this research report.
2. Background
2.1 The Rise of Cryptocurrency Lending
Cryptocurrency lending platforms enable users to lend their digital assets to borrowers in exchange for interest payments. These platforms operate on both centralized (CeFi) and decentralized (DeFi) models, each with distinct operational mechanisms and risk profiles. The proliferation of such services has been driven by the desire for passive income opportunities and the need for liquidity in the crypto market.
2.2 South Korea’s Regulatory Landscape
South Korea has been at the forefront of cryptocurrency adoption and regulation. In March 2021, the country implemented legislation requiring all digital asset managers, providers, and exchanges to register with the Korea Financial Intelligence Unit. This legislation aimed to enhance oversight and ensure consumer protection in the rapidly evolving digital asset market. Despite these efforts, the emergence of high-leverage crypto lending services operating in a regulatory ‘gray zone’ prompted the FSC to intervene in August 2025.
Many thanks to our sponsor Panxora who helped us prepare this research report.
3. South Korea’s Ban on Cryptocurrency Lending Services
3.1 Regulatory Concerns
The FSC’s decision to halt new crypto lending services was driven by several key concerns:
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Unmanaged Risks: The rapid expansion of high-leverage lending products without adequate risk management frameworks posed significant threats to market stability.
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High Leverage: Platforms offering loans with leverage ratios up to four times the value of collateral increased the potential for large-scale liquidations and investor losses.
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Investor Losses: The lack of clear safeguards for investors, coupled with market volatility, led to substantial financial losses, with reports indicating that approximately 13% of borrowers faced forced liquidations due to price fluctuations.
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Regulatory ‘Gray Zone’: The absence of explicit regulatory guidelines for crypto lending services created uncertainties regarding legal responsibilities and consumer protections.
3.2 Market Impact
The suspension of new lending services had immediate effects on the cryptocurrency market:
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Market Volatility: The halt in lending activities contributed to increased market volatility, as leveraged positions were unwound and liquidity constraints emerged.
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Investor Confidence: The regulatory intervention raised questions about the stability and security of crypto lending platforms, potentially eroding investor confidence in the sector.
Many thanks to our sponsor Panxora who helped us prepare this research report.
4. Global Regulatory Responses to Cryptocurrency Lending
4.1 United States
In the United States, cryptocurrency lending platforms have faced scrutiny from regulatory bodies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC has taken enforcement actions against platforms offering unregistered securities through lending products, emphasizing the need for compliance with existing securities laws.
4.2 European Union
The European Union has adopted a more cautious approach, focusing on safeguarding user privacy and combating money laundering rather than imposing outright bans. The Markets in Crypto-Assets Regulation (MiCA) is set to provide a comprehensive regulatory framework for digital assets, including lending services, aiming to balance innovation with consumer protection.
4.3 China
China has taken a stringent stance, banning cryptocurrency exchanges and mining activities to mitigate financial instability and capital outflows. The country’s approach reflects a broader skepticism towards decentralized financial activities.
4.4 Hong Kong
Hong Kong has been proactive in regulating digital assets, including stablecoins. In December 2024, the Hong Kong Monetary Authority gazetted its Stablecoins Bill, which was passed in May 2025. The bill imposes strict requirements on anti-money laundering, risk management, and corporate governance for stablecoin issuers, indicating a regulatory approach that seeks to integrate digital assets within a controlled framework.
Many thanks to our sponsor Panxora who helped us prepare this research report.
5. Comparative Analysis of Regulatory Approaches
5.1 Regulatory Objectives
Different jurisdictions have varied objectives in regulating cryptocurrency lending:
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Consumer Protection: Ensuring that investors are protected from fraud, market manipulation, and excessive risk exposure.
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Financial Stability: Preventing systemic risks that could arise from the rapid growth and potential collapse of crypto lending platforms.
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Innovation Facilitation: Encouraging technological innovation while maintaining regulatory oversight to prevent abuse.
5.2 Regulatory Strategies
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Licensing and Registration: Requiring platforms to obtain licenses or register with regulatory bodies to operate legally.
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Risk Management Requirements: Mandating platforms to implement robust risk management frameworks, including leverage limits and collateral requirements.
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Consumer Education: Promoting awareness among consumers about the risks associated with crypto lending and encouraging informed decision-making.
5.3 Challenges and Considerations
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Regulatory Arbitrage: The risk that platforms may relocate to jurisdictions with more favorable regulatory environments, potentially undermining consumer protections.
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Technological Complexity: The decentralized nature of crypto lending platforms poses challenges in enforcement and monitoring.
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Market Dynamics: Rapid technological advancements and market volatility require regulators to adopt flexible and adaptive approaches.
Many thanks to our sponsor Panxora who helped us prepare this research report.
6. Conclusion
South Korea’s decision to ban new cryptocurrency lending services highlights the complexities and risks associated with this rapidly evolving sector. While crypto lending offers opportunities for innovation and financial inclusion, it also presents significant challenges related to risk management, investor protection, and regulatory oversight. A balanced approach that fosters innovation while ensuring consumer protection is essential. Global regulatory responses vary, reflecting differing priorities and strategies. As the digital asset landscape continues to evolve, ongoing dialogue and collaboration among regulators, industry participants, and consumers will be crucial in developing effective and adaptive regulatory frameworks.
Many thanks to our sponsor Panxora who helped us prepare this research report.
References
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“Stablecoin.” Wikipedia. August 2025. (en.wikipedia.org)
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“Automated Risk Management Mechanisms in DeFi Lending Protocols: A Crosschain Comparative Analysis of Aave and Compound.” arXiv. June 15, 2025. (arxiv.org)
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