South Korea’s financial regulators have openly cautioned domestic cryptocurrency exchanges following the launches of their high-leverage crypto lending products.
FSC and the Financial Supervisory Service (FSS) summoned the CEOs of five top virtual asset exchanges on July 25 to discuss their new product launches with them.
Regulators targeted Upbit and Bithumb in particular for their new coin lending offerings, claiming that they pose potential legal questions and are not adequately protective of investors.
The authorities pointed out that such products enable users to engage in margin buying and short-selling tactics that jeopardize the financial integrity of crypto operators and put retail investors at risk due to their high leverage.
New Lending Services Enable Risky Short-Selling and High Leverage
Bithumb launched its controversial lending product on July 4, enabling users to borrow up to four times the crypto or fiat they hold as collateral, with ten of the largest cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) being supported.
Also on the same day, Upbit introduced a service allowing users to borrow up to 80% of the worth of three cryptocurrencies, Bitcoin, Ripple (XRP), and Tether, in either Korean won or digital currencies as collateral.
Such services effectively facilitate short-selling, whereby investors borrow, sell, and expect to buy back later at lower prices. What raised concerns was the amount of leverage that is obtainable.
Bithumb’s 4x leverage is well beyond the 2x for leveraged ETFs on Korea’s stock exchange, a regulatory trail in crypto regulation.
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Erratic Exchange Reactions in the Recent Scrutiny
In the wake of the emergency meeting, Upbit and Bithumb soon changed their services after the regulatory backlash.
Upbit suspended its USDT lending operations on July 28, acknowledging the issue that lending stablecoins could amount to a regulated money-lending business.
Bithumb then consolidated its lending features on July 29 but retained its 4x leverage limit. It still suspended from accepting new applications because lending capacity was depleted temporarily.
Such reactions have come as an indication that while the exchanges are seeking to cope with high-end products, they are now being compelled to consider regulatory constraints more seriously.
Regulators and Industry to Develop Self-Regulatory Mechanisms
Against the backdrop of increasing controversy, South Korea’s financial regulators have committed to setting up a special task force with industry participants in a bid to develop self-regulation guidelines for crypto margin trading and lending.
The label is an important step towards setting up a regulated oversight framework for crypto markets in the country.
The working group is to respond to issues such as leverage ceilings, risk disclosures to users, and legal classification of lending activities.
Regulators noted that forward-looking self-regulation will be required since the country is looking forward to the second phase of legislation for regulating digital assets, which might take a long time to come into effect.
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Global Context: Rising Leverage, Global Warnings
The concerns concocted by our South Korean regulators face similar happenings worldwide, with authorities being particularly alarmed by excessive leverage in crypto trading.
The Australian financial watchdog, ASIC, recently issued a warning to Bitget crypto exchange for its sale of unauthorized crypto futures products with product leverage levels as high as 125:1 against the 2:1 cap enforced by Australian law.
In the meantime, concomitantly, data indicate leverage usage on crypto exchanges worldwide is now at an all-time high, giving traders an appetite for more risk but also premonitions of instability down the line.
With South Korea stepping in, the implication is clear from other regulators across the world: Lack of oversight of leverage in digital assets trading creates systemic risks that must be urgently addressed.
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