Bithumb Faces Regulatory Warning Over Crypto Lending Services

The Digital Asset eXchange Alliance (DAXA), representing South Korea's leading digital asset exchanges, has raised concerns about Bithumb's cryptocurrency lending service, citing regulatory non-compliance. The warning stems from Bithumb's failure to align its service offerings with new financial authority guidelines enacted in October. This marks another high-profile example of South Korea's increasing regulatory scrutiny over digital asset activities.

DAXA's Public Warning to Bithumb

On October 23, DAXA formally addressed the issue, asserting that Bithumb’s lending practices exceeded the permissible scope outlined in the recently enforced guidelines. To rectify the situation, the alliance requires Bithumb to release an official statement detailing the violations, corrective measures, and relevant notices for users on its website.

The warning spotlights the growing efforts by South Korean regulators to tighten oversight on cryptocurrency services, underscoring the industry's imperative to meet higher compliance standards in protecting investors.

The Rise and Controversy of Crypto Lending Services

Bithumb launched its coin lending program in July, offering retail investors up to 4x leverage. However, national financial regulators quickly raised concerns over potential risks to investor safety. Facing mounting pressure, Bithumb scaled back its lending service by lowering the leverage to 2x and reducing the lending cap from KRW 1 billion to KRW 200 million (approximately $750,000 to $150,000).

South Korean authorities have taken a cautious stance toward such services, citing several risks. The recently issued guidelines, effective October 5, specifically target lending activities involving leveraged funds, loans repayable in Korean won, and third-party custody services. These rules mandate that cryptocurrency exchanges provide lending only using self-owned assets. This provision significantly curtailed business models like Bithumb's, which rely on third-party entities for service execution.

Regulatory Breach and DAXA's Position

Despite the updated guidelines, Bithumb continued its lending operations with the reduced 2x leverage structure and third-party management through Blocktorial, leading DAXA to intervene. In its statement, DAXA stressed the importance of self-regulatory compliance, warning Bithumb of potential disciplinary measures if the violations are not promptly addressed.

The alliance criticized the exchange for falling short of the protective standards established collaboratively by the Financial Services Commission (FSC), the Financial Supervisory Service (FSS), and DAXA. Investors were urged to remain cautious, as Bithumb's lending framework is deemed not fully compliant with ethical and regulatory expectations for user protection.

Legal Ambiguities and Broader Industry Impacts

Although DAXA's warning is grounded in self-regulation rather than formal legal action, market analysts suggest the immediate consequences for Bithumb may be negligible. Yet, the situation underscores deeper tensions between evolving regulatory directives and business models employed by cryptocurrency exchanges.

“This highlights the friction between current regulatory guidelines and established exchange operations,” an industry insider remarked. “Without comprehensive legislation, such disputes will likely reoccur as the industry adapts to inconsistent oversight mechanisms.”

The absence of a robust legal framework continues to pose challenges for South Korea’s cryptocurrency sector. While regulators have set foundational guidelines, exchanges like Bithumb remain vulnerable to ambiguities and evolving rule sets, exacerbating compliance risks.

Conclusion

As South Korea’s digital asset industry experiences tightening regulations, Bithumb's predicament serves as a cautionary tale for other exchanges navigating the increasingly complex regulatory environment. The clash between business innovation and investor protection will likely remain a defining theme as government authorities work toward establishing clearer legal frameworks for cryptocurrency services.