South Korean cryptocurrency exchange Bithumb cut deep into its newly launched crypto lending platform, lowering borrowing limits and leverage ratios in a bid to tackle investor protection concerns.
The move followed the platform halting the service provision temporarily on July 29 due to “inadequate lending volume,” as reported by Kookmin Ilbo, the local news outlet.
After a detailed internal review, Bithumb reopened but scaled back the maximum leverage from 4x to 2x and cut the maximum value that can be borrowed from 1 billion won ($726,000) to 200 million won ($145,000), an 80% reduction.
The new rules cut across the board, even for big-volume traders who have accounted for over 100 billion won ($72 million) in trading volume during the past three years.
Regulatory Pressure and Upcoming New Lending Guidelines
The changes come as part of a wider South Korean regulatory drive to tighten the regulation of crypto lending.
On July 31, the Financial Services Commission (FSC) and Financial Supervisory Service (FSS) allied with the Korea Institute of Finance and major exchanges to create a “Virtual Asset Lending Service Guidelines” working group.
The coalition, made up of members of the Digital Asset Exchange Alliance (DAXA), the country’s top five exchanges, wishes to develop far-reaching regulations for leverage ceilings, acceptable collateral assets, and risk disclosure transparency.
With recourse to international best practices and guidelines used in the stock market, the task force wishes to close loopholes in current law, especially regarding risky lending practices.
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Pre-Approval From Regulators Before Relaunch
According to sources, Bithumb resumed its lending service under stricter terms through close consultation with South Korean regulators.
The exchange, before resuming the service, also reviewed its operational policies with oversight bodies to ensure that evolving standards were being complied with.
Regulators have been most worried about products offering excessive leverage or loans against fiat currency, cautioning that such services can leave investors with asymmetric losses amid volatile market conditions.
By pre-emptively cutting loan caps, Bithumb is signaling a willingness to meet stricter regulations before the final rules are announced.
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Widespread Cryptocurrency Ownership Amplifies Policy Reach
Lending rules are being tightened in a country where there is a high crypto adoption.
As Per the Hana Institute of Finance, more than 25% of South Koreans between the ages of 20 and 50 own some kind of cryptocurrency, with about 14% of their portfolios being financially invested in digital assets.
Considering that the highest adoption rate is among individuals in their 40s, followed by the 30s and 50s, at levels probably close to the national average,
This large spectrum of participation indicates that changes in the lending-related policies could have far-reaching ramifications on the retail side, particularly including those who rely on leverage to trade and expand their portfolios.
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International Context: Increasing Scrutiny of Crypto-Linked Lending
Bithumb’s move reflects a broad international trend of increased oversight in crypto lending segments.
On April 8, blockchain security firm CertiK found a weakness in 0-fee flash loans and NFT offer manipulation, yet no funds were lost; the attack exposed weaknesses in clever contract design.
Notably, again, as regards crypto lending, it was reported on the 28th of July that Democrats in the U.S. launched an investigation into the Federal Housing Finance Agency (FHFA).
The probe was centered on the needs created by the FHFA to consider crypto assets into mortgage lending, paying attention to their volatility, cyber risks, and conflicts of interest.
These events in the crypto lending arena point toward increasing scrutiny from regulators worldwide, suggesting that the days of disoriented regulated crypto lending are coming to an end.
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