South Korea Halts Crypto Lending After $1.1B Boom Sparks Liquidations

South Korea’s crypto market just hit the brakes. The country’s top financial regulator, the Financial Services Commission (FSC), has ordered local exchanges to suspend all crypto lending services starting Tuesday, citing legal uncertainty and mounting investor risks.

Why the Sudden Suspension?

According to the FSC, lending products offered by exchanges were operating in a “legal gray zone” with no clear rules to protect investors. Officials warned that these services exposed traders to dangerous risks, such as forced liquidations when collateral values dropped. Market volatility, they said, could easily trigger sudden losses.

The numbers highlight the scale of the problem. In just a month, 27,600 investors borrowed a total of 1.5 trillion won ($1.1 billion) using crypto-backed loans. Alarmingly, 13% of borrowers already faced liquidations due to sharp price swings.

How the Boom Got Out of Hand

The frenzy started in July, when major exchanges like Upbit and Bithumb rolled out high-risk lending products. Upbit allowed customers to borrow up to 80% of their holdings, while Bithumb went even further, offering loans worth four times a user’s deposit. Smaller platforms rushed to follow suit, creating what regulators described as an “unchecked lending boom.”

Though regulators had already warned exchanges on July 31 to reconsider their lending businesses, Bithumb briefly suspended its service before resuming under tighter rules. The FSC’s latest order, however, leaves no wiggle room, every exchange must halt lending or face inspections and potential penalties.

Forced Liquidations Trigger Alarm

The suspension follows troubling reports of widespread user losses. According to the FSC, one exchange attracted 27,600 users in just a month after launching its lending product in mid-June, generating 1.5 trillion won ($1.1 billion) in loans. However, about 13% of these users, more than 3,600 people, were forced into liquidation as collateral values collapsed during market downturns.

The regulator also flagged two companies that offered USDT lending products, which led to abnormal selling pressure and even caused Tether’s price to briefly dip below its peg. Such events, the FSC warned, show how unregulated lending could quickly spiral into broader market instability.

What’s Next for Crypto Lending?

Despite the crackdown, South Korea is not shutting the door on crypto lending entirely. The FSC emphasized that the suspension is temporary until clear rules are introduced. The upcoming framework is expected to focus on investor safety, transparency, and responsible leverage within the broader digital asset ecosystem.

For now, exchanges can only manage existing contracts, allowing repayments and maturity extensions, but no new loans will be issued.

But crypto lending remains uncharted territory. Without clear licensing or oversight, exchanges have been free to design risky lending models that regulators say leave investors dangerously exposed.