South Korea's FSC Limits Crypto Lending to 20% to Prevent Leverage'

Blueprint for Controlled Lending

At the core of the FSC's "Virtual Asset Lending Guidelines" are three pillars: limiting the scope of services, enhancing user protection, and promoting market transparency. Leveraged lending - which previously allowed borrowers to access up to four times the value of their collateral on platforms like Bithumb - is now completely banned.

This eliminates the amplification of high-risk positions that often lead to consecutive losses during downturns. In addition, “cash-equivalent lending,” which allows repayment in Korean won regardless of token price fluctuations, has been banned for violating local credit laws.

Interest rates on all crypto loans are capped at 20% per year, a ceiling designed to prevent exorbitant yields that could send individual investors spiraling into debt.

Exchanges are required to fund proprietary lending pools with their own capital, prohibiting third-party intermediaries or user-to-user matchmaking that could mask risks and facilitate regulated arbitrage.

To minimize risks from speculative assets, lending is limited to the top 20 cryptocurrencies by market capitalization or those listed on at least three won-denominated exchanges.

Tokens flagged for unusual trading or that are subject to regulatory warnings — such as those linked to potential fraud — must be immediately delisted from lending programs. Platforms are also required to publish real-time data on loan volume, available balances, collateral ratios, and liquidation events, and submit monthly reports to DAXA for monitoring.

User protections form the strongest layer of protection in the guide. First-time borrowers must complete mandatory online training and aptitude tests administered by DAXA, ensuring they understand the risks of liquidation and volatility.

Borrowing limits will be tiered based on trading experience — starting at around 30 million won ($22,000) for beginners and rising to 70 million won ($51,000) for veterans — similar to protections in traditional stock short selling.

Exchanges must provide advance warning of impending forced liquidations, allowing users to add collateral and avoid automatic selling.

Repayments in fiat are still prohibited, keeping transactions tightly contained within the crypto ecosystem. These measures build on the suspension of new lending services on August 19, which stopped the rush after major exchanges launched.

The Securities and Exchange Commission (FSC) plans to closely monitor implementation, and is likely to incorporate the guidelines into formal legislation if they prove effective.

The impact from Korea

For individual investors, the guidelines provide a safety net at the expense of flexibility. High-yield hunters can turn to less regulated jurisdictions, but the 20% cap and leverage ban could reduce liquidation rates by as much as 50%, based on historical data from similar restrictions in traditional finance.

Wealthy family offices in Asia, which have allocated 5% of their portfolios to cryptocurrencies, may favor compliance platforms because of their transparency.

Ethereum staking yields (3.8–6.5%) could emerge as a lower-risk alternative to lending, attracting $19.2 billion in shifts from speculative products.

Exchanges face immediate hurdles: Lending is a major source of revenue, with Bithumb alone issuing $1.2 billion a month.

Compliance costs could increase by 28–35%, similar to the impact of EU MiCA, reducing margins and driving fee increases or product shifts towards staking and custody services.

DAXA’s self-regulatory role will be pivotal, potentially positioning Korean platforms as a model for others in the Asia-Pacific region. Globally, Korean regulations are similar to the EU’s MiCA, which requires reserves and consumer protection, and Singapore’s retail leverage ban, but contrast with the US’s patchwork of state-level regulations.

This could encourage jurisdictions like Japan and India to adopt similar caps, both fragmenting DeFi innovation and fostering institutional trust. Cross-border lenders could adopt AI-based risk management tools and smart contract audits — currently required by 49% of institutional users — to ensure compliance.

Evaluation and Conclusion

Ultimately, while limiting short-term speculation, these guidelines could pave the way for sustainable growth, bringing cryptocurrencies in line with traditional finance’s risk management standards. As the FSC monitors the results, South Korea reaffirms its role as a regulatory leader.

Disclaimer: The information presented in this article is the author's personal opinion on the cryptocurrency field. It is not intended to be financial or investment advice. Any investment decision should be based on careful consideration of your personal portfolio and risk tolerance. The views expressed in the article do not represent the official position of the platform. We recommend that readers conduct their own research and consult with a professional before making any investment decisions.