South Korea Freezes Crypto Lending While ETFs Gain Speed

• South Korea stops crypto lending services while shaping rules for safe digital markets.
• The FSC pushes with spot ETFs and stablecoins to support long-term market growth.
• Lawmakers and the central bank clash over stablecoin issuers and monetary control in Korea.

South Korea’s Financial Services Commission (FSC) has ordered local digital asset exchanges to suspend all new crypto lending services starting Tuesday. The announcement described the halt as an administrative measure designed to protect users until comprehensive rules are finalized. Exchanges can still manage existing loans, but no new borrowing activity will be allowed until the country establishes formal guidelines for lending.

Regulatory Reset in a Growing Market

The halt follows the launch of several aggressive lending services in July. While Upbit allowed customers to borrow up to 80 percent of the value of their Korean won deposits or digital assets using USDT, Bitcoin, and XRP as collateral, Bithumb permitted borrowing up to four times the value of held assets or won deposits, resuming its services under strict conditions after a suspension. Apart from these, teh other platforms quickly introduced similar offers, creating a sharp rise in leveraged activity.

On July 31, the FSC raised concerns, urging exchanges to reevaluate their programs due to the legal uncertainty surrounding crypto lending. Authorities noted that the activity presented high risks of user losses. The country had, back then, tightened regulations in 2023, restricting anonymous trading accounts to strengthen oversight. Analysts see the new decision as part of a longer pattern of regulatory adjustments designed to align with global standards while safeguarding one of Asia’s most dynamic markets.

The Digital Asset Basic Act, recently proposed by the ruling party, seeks to permit lending services under defined conditions. Yet the FSC’s intervention raises a need for rules before expansion continues. Apart from banning crypto activity, the order reflects a pause as policymakers prepare to add more measures.

Parallel Push for ETFs and Stablecoins

While crypto lending is halted, the government is moving ahead with frameworks to support new regulated products. The FSC aims to approve spot crypto exchange-traded funds by late 2025. Plans include building secure custody systems, standardized pricing models, and improved investor protections. Trading fees could drop from 0.05 percent to 0.015%, making market entry more accessible.

At the same time, South Korea is developing a won-pegged stablecoin. A coalition of banks is collaborating with fintech firms to launch a stablecoin by 2026. Draft legislation detailing the roles of issuers, collateral rules, and internal risk controls is scheduled for October 2025. 

Global market conditions also shaped the decision. reported that crypto-collateralized loans rose 27% in the second quarter to $53.1 billion, reaching levels last seen during the 2022 bull cycle. A $1 billion liquidation wave last week, driven by bitcoin’s retreat from $124,000 to $118,000, revealed how quickly leverage can collapse.

Related: South Korea Warns Asset Managers to Cut Exposure to Crypto ETF Holdings

Debate Over Investor Protection and Innovation

Not everyone agrees with the regulator’s approach. Bradley Park of DNTV Research argued that authorities should enforce stronger safeguards rather than halting lending entirely. “The rational approach is to upgrade UI/UX, risk disclosures, and LTV controls to manage exposure safely,” Park wrote, noting that most exchange lending is concentrated in stablecoins used to build short positions.

The issue goes further into the stablecoin idea. The Financial Times reports that lawmakers supported a bill allowing stablecoins to be issued even by companies with only 500 million won worth of equity-paid-up capital, presumably to attract capital flows and reduce reliance on dollar-backed assets. 

The Bank of Korea opposes this, pointing out that such issuers might endanger monetary stability and invite foreign-exchange risks evocative of the 1997 Asian financial crisis. With the halt, a crucial question arises, indicating whether this reset would enable South Korea to come up with a digital asset framework or push its traders offshore.