South Korea Orders Halt to New Crypto Lending Amid Rising Leverage Risks
August 19, 2025 — In a significant regulatory move aimed at protecting users and maintaining market stability, South Korea’s Financial Services Commission (FSC) has instructed cryptocurrency exchanges to suspend the launch of new crypto lending products. This decision reflects growing concerns over increased leverage in the crypto market and recent disruptive liquidation events that have raised red flags regarding market risks.
Background: Surge in Crypto Leverage and Recent Liquidations
Crypto-collateralized lending has become increasingly popular as investors seek to amplify their exposure in the digital asset space. However, this growth has also brought heightened risks. A recent report by Galaxy Digital highlighted that crypto-backed loans surged 27% in the second quarter of 2025, reaching $53.1 billion—the highest level seen since early 2022. Tensions came to a head in June when Bithumb, one of South Korea’s largest exchanges, saw over 27,000 customers utilizing lending services. Approximately 13% of these users faced forced liquidations after volatile swings in collateral values, underscoring the dangers of high leverage in a rapidly shifting market. Moreover, last week witnessed a dramatic $1 billion liquidation wave spurred by bitcoin’s price drop from $124,000 to $118,000, illustrating how quickly leveraged positions can unwind.
Regulatory Response: Suspension of New Lending Products
In response to these developments, the FSC issued administrative guidance that permits existing loans to mature naturally but prohibits the introduction of new lending offerings until formal regulatory guidelines are developed. The FSC emphasized that ignoring this directive could trigger on-site inspections and further supervisory action against non-compliant platforms.
The regulation aims to mitigate harmful market distortions and shield retail investors from undue risk amid volatile price movements. Officials expect to release detailed lending frameworks in the coming months to better govern crypto loan products and associated risks.
Industry Perspectives: Calls for Improved Safeguards Over Shutdowns
Not all voices within the industry agree with the blanket suspension approach. Bradley Park, an analyst at DNTV Research, argues that rather than halting new lending services altogether, exchanges and regulators should focus on strengthening user interfaces, improving risk disclosures, and setting prudent loan-to-value (LTV) limits to manage exposure safely.
Park noted that the primary concern for regulators might be structural market distortions, such as the negative kimchi premium—the gap between cryptocurrency prices in South Korea compared to international markets—rather than the lending services themselves. He also highlighted transparency issues that complicate oversight. For example, while Bithumb publicly shares the scale of its lending activities, Upbit, South Korea’s largest exchange, does not, making it difficult for regulators to accurately assess systemic risks.
He suggested that reopening lending products should wait until these transparency and market structure challenges are addressed, advocating for a data-driven regulatory design rather than broad restrictions.
Global Context: Rising Crypto Leverage and Market Strains
South Korea’s crackdown coincides with a broader global trend where leverage in crypto markets is climbing back toward levels seen during previous bull runs. Analysts have pointed out emerging stress symptoms, including liquidity shortages in decentralized finance (DeFi), exit queues in Ethereum staking, and increasing discrepancies between on-chain and over-the-counter lending rates.
These developments underscore the delicate balance regulators face: fostering innovation and growth while managing systemic and user-level risks inherent in a highly speculative market.
About the Author:
Sam Reynolds is a senior reporter based in Asia, specializing in cryptocurrency and financial markets. He was part of the CoinDesk team awarded the 2023 Gerald Loeb award for outstanding breaking news coverage of the FTX collapse.
For more updates on cryptocurrency policy and market developments, subscribe to CoinDesk’s Crypto Daybook Americas newsletter.