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Upbit, Bithumb face regulatory scrutiny over leveraged coin lending
Coin prices are displayed at Bithumb's offices in Gangnam District, Seoul, July 10. Yonhap
By Jun Ji-hye
Upbit and Bithumb, Korea's two major cryptocurrency exchanges, were slapped with a warning from financial authorities over their recently launched crypto lending services, which regulators say involve legal uncertainties and lack sufficient investor protection measures, government and industry officials said Wednesday.
Authorities voiced concerns that the leveraged investment features of the services could leave users vulnerable and threaten the financial stability of virtual asset service providers.
The Financial Services Commission, the country's financial regulator, and financial watchdog Financial Supervisory Service conveyed these concerns directly to executives from the country's five exchanges during a meeting held last Friday, where the companies' plans for crypto lending were reviewed.
On July 4, Bithumb launched a service that allows users to borrow coins up to four times the value of their collateral, which can be either digital assets or Korean won. The service covers 10 cryptocurrencies, including Bitcoin, Ethereum, Ripple and Tether.
Upbit also introduced a similar lending service on the same day, targeting three coins — Tether, Bitcoin and Ripple — while allowing users to borrow up to 80 percent of the value of their deposited won or digital assets.
These services enable investors to effectively engage in short-selling strategies by borrowing coins they do not own, selling them and then buying them back at a lower price to repay the loan.
In particular, Bithumb's service has raised concern over insufficient investor protection, as it permits leverage up to four times the investor's capital. Currently, leveraged ETFs listed on the domestic stock market are limited to a maximum of two times the leverage.
Following the regulatory meeting, Upbit discontinued its Tether lending service on Monday. This decision was based on the assessment that lending the stablecoin and charging fees for it could be classified as engaging in money-lending business.
Bithumb, however, stated that its fourfold lending option remains unchanged.
"Since we have completed the legal review of this product, we plan to continue operating it without changes for now," a Bithumb official said. "If self-regulatory guidelines are later established by the authorities and the industry, we will adjust accordingly to ensure compliance."
Amid the ongoing debate over crypto lending, financial authorities have agreed to work with the industry to form a task force aimed at developing voluntary regulations, recognizing that formal legislation may take time and interim self-regulation is necessary.
Self-regulatory measures are expected to include limits on coin short-selling and margin trading, along with qualification requirements such as mandatory investor education, similar to those for the stock market.