The Financial Services Commission (FSC) of South Korea recently introduced a new guideline aimed at regulating credit services offered by centralized cryptocurrency exchanges. Effective from September 5, the regulation caps the interest rates for crypto loans at 20% and prohibits leveraged loans that surpass collateral value. By introducing these guidelines, the FSC intends to curb risky financial practices in crypto markets.
New Rules for Cryptocurrency Loans
According to Chosun, the guidelines specify that crypto loans cannot exceed a 20% interest rate. Borrowing that exceeds the value of collateral and products demanding cash repayments will not be permitted. Companies are required to offer these services using their own equities only, thus disallowing indirect methods through third parties to circumvent the regulations.
Under the new regulations, users’ credit limits will be determined depending on their transaction history and experience. It is mandatory to notify borrowers beforehand if they are at risk of liquidation. The regulatory oversight is entrusted to the Digital Assets Exchange Alliance (DAXA), formed by local exchanges. The FSC plans to formalize these rules into legislation based on the outcomes of the new implementation.
The credit services are restricted to the top 20 cryptocurrencies by market value. Additionally, assets that are traded on at least three licensed local exchanges can also be considered. However, if any of these cryptocurrencies are categorized under a warning status by the exchange, issuing loans against such digital assets will be immediately ceased.
Alignment of Crypto Exchanges
The regulation was initiated following the introduction of credit services by major exchanges like Upbit and Bithumb. On August 19, the FSC had instructed local exchanges to temporarily halt their credit activities. The new guidelines establish a permanent framework in this domain.
FSC has stated that the regulation was crafted after considering international examples and is in alignment with global practices. Through these comprehensive measures, South Korea has taken a significant step forward in enhancing user protection and ensuring market stability in crypto lending.
