Seoul Watchdogs Sound Alarm on Upbit, Bithumb Crypto Lending Products

South Korean financial watchdogs in Seoul have sounded an alarm regarding crypto lending and margin trading services recently introduced by major exchanges Upbit and Bithumb, citing concerns over high-leverage trading operations.

The two exchanges, Upbit holding the position as Korea’s dominant crypto platform and Bithumb ranking second, collectively control the majority of the nation’s digital asset trading volume.

According to a July 30 local report, the Financial Services Commission (FSC) and Financial Supervisory Service (FSS) convened meetings with executives from Korea’s five leading cryptocurrency exchanges to address these new financial products and voice regulatory concerns regarding leverage-associated risks and potential deficiencies in investor protection frameworks.

Regulators have expressed concerns over high-risk lending products from Upbit and Bithumb, prompting a push for industry self-regulation.https://t.co/Tv1hXouWRi

Bithumb initiated its cryptocurrency lending service on July 4, allowing users to borrow digital assets using their existing cryptocurrency holdings or Korean won as security, offering leverage ratios up to 4:1.

The service encompasses 10 digital currencies, including Bitcoin, Ethereum, Ripple, and Tether.

Coinciding with Bithumb’s launch, Upbit rolled out a comparable lending platform supporting three cryptocurrencies: Tether, Bitcoin, and Ripple. The platform is similarly collateralized by crypto assets or traditional currency deposits.

These platforms allow traders to borrow cryptocurrencies they don’t possess and execute short sales, generating profits when asset values decline, essentially creating short-selling mechanisms within the virtual asset marketplace.

Financial authorities have expressed strong concern that these exchanges may be contravening Korea’s Lending Business Act through their high-risk operations. They particularly pointed out Bithumb’s 4:1 leverage ratio, which surpasses the 2:1 leverage limitation established for Korea’s traditional equity markets.

Ki Young Ju, a Seoul-based crypto investor and founder of CryptoQuant, has also noted the dangerous nature of excessive margin trading, particularly when leverage exceeds 4:1 ratio.

In a recent social media post, Ju emphasized that utilizing leverage above 5:1 exponentially increases the probability of liquidation within a 24-hour period, noting:

“Bitcoin moved more than 2% on most days (82%) this month. If you play 50x Russian roulette every day, the chance of surviving a week is only 0.000612%.”

Regulators have expressed concerns over high-risk lending products from Upbit and Bithumb, prompting a push for industry self-regulation.https://t.co/Tv1hXouWRi

Following regulatory pressure, Upbit discontinued its Tether lending service, citing concerns that providing stablecoin lending in exchange for fees could be construed as consumer lending activity, potentially subjecting the platform to Korea’s lending regulations.

Bithumb responded by modifying its service framework while preserving its 4:1 leverage structure. The exchange has temporarily suspended new lending applications due to an exhausted lending inventory.

The FSC and FSS are planning to establish an industry collaborative task force to develop voluntary self-regulatory guidelines for cryptocurrency lending and margin trading operations.

These developments occur amid a series of investment sector restrictions as Seoul regulators prioritize consumer protection measures.

On July 23, the FSS advised asset management companies to avoid “excessive inclusion” of cryptocurrency-related stocks such as Coinbase and MicroStrategy in their ETF portfolios.

However, some regulatory constraints may be reconsidered as South Korea considers reclassifying cryptocurrency trading and brokerage operations as “venture companies,” a designation that would provide access to government subsidies, tax benefits, and financial assistance programs.

Current legislation, implemented in 2018, specifically prevents blockchain-based cryptocurrency firms from obtaining venture certification, categorizing them alongside gambling establishments and entertainment venues.

The proposed regulatory amendment seeks to reverse this classification, potentially legitimizing the country’s expanding digital asset industry.

Regulators have expressed concerns over high-risk lending products from Upbit and Bithumb, prompting a push for industry self-regulation.https://t.co/Tv1hXouWRi

Venture company status in South Korea provides numerous advantages, including tax reductions and enhanced access to government-backed financing programs.

These benefits were previously denied to crypto firms, as demonstrated by Dunamu, Upbit’s parent company, which incurred an $18 million corporate tax liability following the revocation of its venture certification

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