South Korea’s financial authorities have expressed serious concerns over the newly launched coin lending services by leading cryptocurrency exchanges Upbit and Bithumb, citing legal ambiguities and insufficient investor protections.
On July 25, the Financial Services Commission (FSC) and Financial Supervisory Service (FSS) convened executives from five major crypto exchanges to discuss their coin lending plans and conveyed their apprehensions regarding potential risks.
Regulators particularly highlighted the dangers of leveraged investing, noting that current safeguards for users are inadequate and that the financial stability of virtual asset providers could be at risk.
Upbit introduced its coin lending service earlier this month, allowing users to borrow up to 80% of the value of stablecoins like Tether (USDT), Bitcoin, and Ripple (XRP) using Korean won deposits or digital assets as collateral.
Shortly after, Bithumb launched a service enabling customers to borrow coins up to four times their holdings or collateral value, supporting ten cryptocurrencies including Bitcoin, Ethereum, Ripple, and Tether.
These services effectively enable investors to engage in short selling by borrowing coins they do not own, selling them, and repurchasing at a lower price to repay their loans.
Concerns have mounted particularly over Bithumb’s 4x leverage offering, with critics warning of insufficient investor protections. For comparison, leveraged ETFs in the domestic stock market are capped at 2x leverage.
Following regulatory discussions, Upbit suspended its Tether lending service on July 28 amid concerns that charging fees for stablecoin lending may fall under moneylending regulations.
Bithumb, which consolidated its coin lending services on July 29, confirmed no changes to its 4x leverage product but temporarily halted new loan applications due to full capacity.
In response to ongoing concerns, financial regulators plan to establish a task force with industry stakeholders to develop self-regulatory measures for coin lending and margin trading services.
Given the lengthy legislative process for the second phase of virtual asset regulation, authorities emphasize the urgent need for industry-led self-regulation.
Expected measures include limits on coin short selling and margin trading, qualification requirements, and investor education programs—paralleling existing safeguards in the stock market.
In equities trading, short selling is regulated through measures such as the uptick rule and mandatory disclosure of short positions, while retail investors must complete educational programs before engaging in short sales or investing in high-risk leveraged products like leveraged ETNs.
