South Korea’s financial regulator has imposed a cap of 20% annual interest on cryptocurrency loans and banned leveraged loans that exceed collateral value. This regulatory move aims to reduce retail investors’ exposure to sharp price swings and to prevent loan practices that could trigger mass liquidations. The measure also restricts eligible assets and imposes training and suitability tests for borrowers.
Key provisions of the regulation
The central element is the 20% interest cap on crypto loans, prohibiting providers from charging more than 20% per year, which seeks to limit predatory rates in the retail lending market and reduce the speed at which credit can amplify losses. The ban on leveraged loans above the value of posted collateral prevents credit expansion beyond deposited assets, closing a channel that could multiply losses and cascade liquidations during rapid price drops.
Asset eligibility and borrower requirements
The regulation narrows which assets can be used as collateral by allowing only cryptocurrencies ranked in the top 20 by market capitalization or those listed on at least three exchanges operating in South Korean won, a rule designed to favour more liquid and better-known tokens. Borrowers must complete online training and pass suitability tests administered by DAXA, ensuring that retail users face entry standards and basic risk awareness before accessing loans.
Rationale and background
The intervention responds to sustained growth in crypto credit and exposures the regulator regards as systemic, following episodes where platforms offered high leverage and large loan sizes that increased the risk of cascading liquidations and led to temporary service suspensions and broader reviews. By limiting leverage and standardizing transparency and eligibility, the rule seeks to curb practices that can create chain bankruptcies and protect nonprofessional investors from extreme market volatility.
Effects on centralized and decentralized markets
Centralized exchanges will need to adjust business models, manage capital provisions, and modify credit products to comply with the new rules, which could reduce loan supply and raise costs but should lower systemic failure risk. DeFi protocols face challenges in fitting decentralized designs into rules aimed at regulated entities, opening debate about regulatory scope and whether decentralized services fall under the same constraints.
Implications for adoption and market stability
The regulation aims to balance innovation with protection by prioritizing system resilience while allowing gradual crypto integration into the financial framework, where limiting leverage and capping rates reduces space for abusive practices that harm market trust. In the short term, operational and product adjustments are expected; in the medium term, the measures may foster a more resilient ecosystem aligned with financial sovereignty and investor protection.
South Korea’s decision acts as a brake on disorderly crypto credit by capping interest, prohibiting excessive leverage and tightening eligibility and borrower standards, which should make the market more stable and reduce the likelihood of cascade failures. The regulatory changes will prompt immediate adjustments by platforms and could contribute to a more robust crypto credit environment over time.
