South Korea sets 20% cap on crypto lending rates, bans leveraged loans, and introduces strict rules to protect retail investors.
South Korea’s Financial Services Commission (FSC) has introduced new guidelines for crypto lending on centralized exchanges. These policies, which were released on Friday, should safeguard users and introduce sanity to the rapidly expanding crypto lending space. The regulations prohibit leveraged lending, limit interest rates to 20 percent, and offer tough regulations on platforms that provide crypto lending. This is a significant milestone in ensuring the responsible fall of digital assets in the country.
South Korea Prioritizes Safer Crypto Lending with New Risk Controls
First of all, new regulations clarify that users can never borrow more than the worth of their crypto collateral. It means that leveraged lending, when one takes an additional loan in the hope of capitalizing on a market shift, is no longer permitted. Rather, users can only borrow the same or less amount of what they already have. Exchanges may establish limits on lending between 30 million won (21580) and 70 million won, depending on trading history and user experience. This assists in minimizing risk and promotes safer practices.
Related Reading: South Korea Plans Won-Backed Stablecoin Regulations | Live Bitcoin News
Moreover, the regulations prohibit lending in cash equivalents. The practice enabled users to borrow crypto and pay back later in a fixed sum of cash, whether the market price went up or down. This was perceived by regulators as a breach of credit rules in Korea. In the future, it is possible to lend only properly established cryptocurrencies. In particular, they need to have a market capitalization of the top 20 or be listed on a minimum of three Korean won-based exchanges. This makes sure that only trusted assets are involved.
Moreover, transactions should be more transparent. They must now show a clear disclosure of interest rates, fees, volume of lending and liquidation risks. Such information should be provided on an ongoing basis or monthly. New users also need to undergo online training and a suitability test offered by the Digital Asset Exchange Alliance, an organization created by the major crypto exchanges in Korea. These requirements are to inform the users and avoid risky behavior.
Government Halts Aggressive Crypto Loans Amid Consumer Risk
Large exchanges such as Bithumb and Upbit had previously provided aggressive lending options. Bithumb provided up to four times the holdings to borrow, and Upbit provided up to 80 percent of the holdings to lend. Such risky products spurred short selling and speculative trading. As the exchanges started competing, governments became worried about the potential harm to consumers. The government responded by asking to stop such lending products in August.
Subsequently, the Digital Asset Exchange Joint Consultative Body (DAXA), and a government task force collaborated in drafting the new guidelines. Despite the fact that these rules are now self-regulatory, officials intend to transform them into law once they have reviewed their performance in practice. An FSC spokesperson stated that the goal is to offer safer crypto lending, which includes offering clear directions and greater investor protection.
To sum up, new regulations on crypto lending in South Korea establish a precedent in investor protection in digital finance. The country is a step closer to having a well-regulated and transparent crypto market with these changes. In the long run, the government is optimistic that it can implement complete legislation to keep pace with the changing crypto environment.
