South Korea’s regulatory authorities have raised fresh concerns over high-leverage cryptocurrency lending and margin trading services, warning that such products pose significant risks to investor protection and market stability. The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have specifically flagged offerings from major exchanges like Upbit and Bithumb, which provide up to 4x leverage on selected tokens, for operating without clear regulatory frameworks [1]. Regulators have urged platforms to adopt voluntary self-regulation to address legal uncertainties and protect retail investors from potential losses.

The scrutiny has already prompted some market adjustments. Upbit suspended its Tether lending product in response to fears of being classified under Korea’s Lending Business Act, while Bithumb modified its lending structure but retained 4x leverage on certain tokens [1]. These moves reflect the growing pressure on exchanges to align with evolving regulatory expectations. Stablecoin lending, in particular, has drawn attention due to its potential classification as consumer lending, which could subject it to stricter compliance requirements under existing financial laws [1].

Experts warn that overly stringent regulations could inadvertently drive users to offshore platforms where regulatory oversight is minimal. This migration could expose investors to higher risks of fraud, liquidity issues, and weaker investor protections [1]. Such a shift might also undermine Korea’s ability to maintain control over its domestic crypto market, raising concerns about systemic vulnerabilities and regulatory arbitrage.

South Korea’s regulatory landscape is continuing to evolve, with the Bank of Korea recently rebranding its Digital Currency Research Lab to signal a stronger focus on market supervision [2]. Meanwhile, the FSC is reportedly working toward approving spot crypto ETFs by late 2025 and exploring the use of deposit tokens on public blockchains [1]. These developments suggest a cautious yet proactive approach to managing the crypto sector while balancing innovation with risk mitigation.

The broader implications for investors are clear: as the regulatory environment matures, users must remain vigilant about the risks associated with high-leverage products and the potential consequences of regulatory shifts. While enhanced oversight may improve market stability and investor confidence, the risk of offshore migration highlights the need for a balanced regulatory framework that prevents unintended consequences.

The situation also underscores the global challenge of regulating digital assets, which operate across borders and often outpace national legal frameworks. As jurisdictions like the U.S. continue to outline structured policy approaches, such as recent proposals from the Trump administration for stablecoins and tokenisation [3], the importance of international coordination becomes increasingly evident. A fragmented regulatory landscape could foster instability and increase the risk of cross-border financial spillovers, making collaboration essential for a sustainable crypto ecosystem.

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Source:

[1] https://decrypt.co/332881/south-korea-flags-upbit-and-bithumbs-crypto-lending-margin-trading-services

[2] https://www.ainvest.com/news/bank-korea-establishes-virtual-asset-team-regulate-cryptocurrencies-stablecoins-political-debates-2507/

[3] https://coinpedia.org/crypto-live-news/