South Korea’s Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have summoned officials from five major domestic cryptocurrency exchanges following the introduction of margin trading products.
The concern centers on high-leverage lending schemes, particularly those allowing short-selling via borrowed funds. After Upbit and Bithumb launched such services – offering up to 4x leverage – regulators raised warnings.
Crypto Trading Services Face Regulatory Scrutiny in South Korea
Bithumb became the first major platform to offer a lending service on July 4th, enabling users to borrow crypto or fiat assets against digital collateral with a maximum 4x leverage. Following suit on the same day was Upbit, although initially restricted to three specific tokens.
Concerned about potential legal violations under the nation’s Lending Business Act, Upbit subsequently suspended its Tether lending program. Bithumb adjusted its initial lending structure but maintained its controversial 4x leverage option, drawing explicit regulatory caution.
In response to these developments, regulators issued formal summonses to officials at the country’s top exchanges last week.
Expert Views: Market Risks and Regulatory Trepidation
Experts warn that aggressive domestic regulation could inadvertently encourage users to migrate to less compliant foreign platforms, diminishing local investor protections and South Korea’s ability to shape its crypto market.
“Regulators are likely viewing stablecoin lending services as ‘consumer lending’ under Korea’s existing financial framework,” explained Ben Ko, co-founder of Catalyze Research cited by Decrypt. “Moreover, significant parts of Korea’s crypto market may indeed be operating largely outside established regulatory frameworks typical for traditional financial oversight.”
Mr. Ko further cautioned that stricter rules compelling users offshore could not only reduce the effectiveness of domestic safeguards but also expose users to platforms with weaker compliance standards and correspondingly higher risks.
As a management measure, the FSC and FSS plan to create a joint task force with the exchanges to develop voluntary self-regulation guidelines. The clear potential for market warning signs underscores the sensitive balance regulators must strike.
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