Key Points:
- South Korea’s Financial Services Commission (FSC) has mandated the halt of new crypto lending products to curb potential risks to users and enhance market stability.
- This decision comes in light of increasing leverage in the crypto market and a recent liquidation event amounting to a staggering $1 billion.
- Critics posit that rather than shutting down, improving existing systems for safety and transparency should be the focus.
South Korea’s Financial Services Commission (FSC) has directed exchanges to suspend all new crypto lending products until comprehensive guidelines are established. This action reflects concerns about the dangers posed to consumers and market integrity. For example, a recent incident at Bithumb involved over 27,000 clients utilizing lending services, where 13% faced forced liquidations when collateral values changed unfavorably.
The FSC’s move follows a report by Galaxy Digital, which emphasized substantial leverage levels as a significant risk within crypto markets. Under the new direction, current loans are permitted to conclude, but no additional lending operations are allowed. Failure to comply could lead to inspections and regulatory actions. New lending regulations are expected to be released in the near future.
This crackdown coincides with an alarming trend, as global crypto leverage approaches bull market thresholds. Reports indicate a 27% increase in crypto-backed loans, soaring to $53.1 billion in Q2, marking the highest level since early 2022. Recent liquidation events, particularly a notable one linked to Bitcoin’s price fluctuations, underscore the volatility and hazards of over-leveraging.
However, the perspective on the authorities’ actions remains contentious. Bradley Park from DNTV Research argues in favor of enhancing existing practices over a complete ban, suggesting improvements in user interface, risk disclosures, and loan-to-value (LTV) limits to handle exposure responsibly. Park points out potential market structure distortions, like the negative kimchi premium, might be the focal concern instead.
He expressed that without addressing these fundamental issues, any potential reopening of lending services will be delayed and urged a shift toward understanding underlying mechanisms with a data-driven approach, rather than imposing blanket restrictions.
