South Korea’s top financial watchdog has ordered crypto exchanges to halt all new digital asset lending services, citing growing risks to investors and the lack of clear rules. The Financial Services Commission (FSC) confirmed on Tuesday that it sent letters to exchanges demanding an immediate suspension of new lending operations until official guidelines are introduced. Existing contracts, including repayments and maturity extensions, will still be allowed.

The crackdown comes after the FSC and the Financial Supervisory Service (FSS) formed a joint task force in late July to design a regulatory framework for crypto lending. The upcoming rules are expected to include strict limits on leverage, eligibility criteria for users, and mandatory risk disclosures. The regulator also warned it would conduct on-site inspections and impose penalties on platforms that fail to comply.

The decision follows alarming reports of investor losses, including thousands of forced liquidations in exchange-operated lending programs. One unnamed exchange attracted more than 27,600 users in a month after launching a lending service in June, recording nearly 1.5 trillion won ($1.1 billion) in transactions. However, around 13% of its users, or 3,635 people, suffered forced liquidations as crypto prices dropped.

The FSC also flagged cases of two companies offering Tether (USDT) lending products, which triggered heavy selling pressure and unusual price declines for the stablecoin. Officials warned that continuing new lending services without safeguards could severely damage investor confidence and funds.

South Korea has taken major steps to regulate virtual asset providers since 2020, introducing Anti-Money Laundering rules and the Virtual Asset User Protection Act in 2023. However, crypto lending remains in a regulatory gray area, operating without licenses or clear legal protections. The FSC’s latest move signals that tougher oversight is imminent.