Digital Asset Lending Services Surge Under New Regulatory Guidelines

The digital asset lending market in South Korea is undergoing a significant resurgence as platforms adapt to newly implemented regulatory frameworks following earlier restrictions by financial authorities. Major cryptocurrency exchanges, including Upbit, Bithumb, and most recently Coinone, have ventured into this growing sector. However, the industry continues to grapple with calls for more robust legislative clarity, as current investor protection measures remain guidelines rather than enforceable mandates.

Coinone Launches ‘Lending Coins’ Service

On October 16, Coinone expanded the competition in the digital asset lending market by introducing its new service, ‘Lending Coins.’ Coinone joins Upbit and Bithumb, which debuted their lending services earlier in July. This platform enables users to borrow digital assets by depositing Korean won as collateral. Borrowers can sell the borrowed assets at higher market prices and reacquire them at lower prices to repay their loans, a strategy akin to short-selling in traditional equity markets.

While the introduction of such services meets investor demand, they have drawn criticism for facilitating high-risk leveraged trading. This has prompted regulators to intervene. On October 5, financial authorities issued updated guidance aimed at mitigating risks. These regulations imposed borrowing limits, capped annual fees at 20%, and restricted eligible cryptocurrencies for lending to the top 20 by market capitalization. Furthermore, loans that involve monetary transactions or leverage-based strategies were explicitly prohibited.

Regulatory Influence on Exchanges’ Lending Offerings

Cryptocurrency exchanges have had to restructure their lending offerings to align with these new rules. Upbit, for instance, temporarily halted its services in August due to financial sanctions but resumed on October 8 under stricter compliance measures. The platform reduced its maximum collateral deposit limit from 50 million won to 37.5 million won and barred users from accessing the service if they previously failed to meet at least 80% collateral coverage. Additionally, Upbit revised its deposit procedures to allow collateral deposits exclusively, without the option for withdrawals.

Bithumb, on the other hand, has taken a different approach. Although the platform reduced its leverage ratio from 4x to 2x, this adjustment still falls short of compliance with the complete prohibition of leverage mandated by the new regulations. Apart from this, Bithumb’s partnership with Blocktorial—a third-party service provider—violates guidelines banning indirect third-party operations. A representative from Bithumb acknowledged these issues, stating, “We are reviewing all aspects to align with the regulations.” Despite these challenges, the platform has continued its lending operations, indicating that compliance is still a work in progress.

Impact of Regulations on Domestic and International Competition

The revised domestic lending regulations have heightened concerns about the competitive positioning of South Korean exchanges compared to their international counterparts. Global platforms like Binance and Bybit, which offer leverage levels of up to 125x, provide starkly contrasting opportunities for investors, making them attractive alternatives for those restricted by South Korea’s regulations.

Critics of the regulatory environment argue that overly restrictive domestic policies may inadvertently drive investors towards international exchanges, further weakening the local industry. One representative from a leading domestic platform remarked, “Restricting investment options locally is fueling capital flight to overseas platforms. South Korea needs a clear, well-defined legislative framework that supports both investor protection and market growth.”

However, some industry experts believe the disparity between domestic and international exchange usage is more nuanced. Oh Jong-wook, CEO of Wavebridge, noted, “Investors have been aware for a long time that domestic platforms have limits on leverage and derivatives trading. The gap between local and global investor preferences reflects different user priorities rather than just regulatory pressures.”

Navigating the Future of South Korea’s Digital Asset Market

South Korea’s evolving regulatory landscape has left its digital asset market at a pivotal crossroads. The debate rages on regarding whether the current guidelines achieve the right balance between protecting investors and enabling market competitiveness. As exchanges grapple with compliance challenges and as concerns mount over losing market share to global competitors, industry leaders and experts advocate for more tailored and accommodative legislation.

The need for clear, enforceable laws will be critical in fostering innovation while maintaining adequate consumer protections. Until then, the market remains in flux as industry participants adapt, respond, and seek to thrive within these rapidly shifting boundaries.