The Bank of Korea (BoK) has come out to warn that increasing cases of leveraged crypto trading by South Korean citizens pose a significant threat to the country’s financial system. A report broke this news on May 27, citing comments from BoK Governor Lee Ju-yeol, who spoke after a monetary policy committee meeting yesterday. According to Ju-yeol, the volatility of digital currencies makes the South Korean financial system susceptible to instability whenever leveraged crypto trading increases.
According to the report, Ju-yeol intends to closely monitor the transactions of financial institutions dealing with leveraged crypto trading in the country. While it did not disclose what measures it intends to implement to meet this challenge, it could easily push for a reduction in the number of new loans granted. This is because an increase in defaults by borrowers could have detrimental effects on the entire banking system in South Korea.
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Ju-yeol further cited that central banks and financial institutions must work together to address crypto-related issues in the country. According to him, the high liquidity in the low interest rate environment encourages more households to take out loans, mainly as a hedge against inflation when investing. To this end, the country’s unliquidated household debt stood at 1,666 trillion won (£ 1.06 trillion) at the end of March.
High-risk traders in BTC are fueling its volatility
Like South Korea’s banking system, BTC is also facing great instability as traders who take excessive risk in the unregulated cryptocurrency market are forced to sell when prices plummet. According to analysts, clients using Asian crypto exchanges like BitMEX have been using up to 100: 1 leverage. As a result, they caused BTC to drop 30% last week as they lined up sell orders to pay brokerage firms.
Meanwhile, many South Korean exchanges are nearing collapse as they continue to work towards obtaining a business license that allows them to operate as legal trading platforms. South Korea’s Financial Services Commission (FSC) reportedly needs exchanges to join banks and open real-name accounts for their clients before September 24.
On the other hand, banks have proven difficult to work with as they fear that partnering with cryptocurrency exchanges will make them liable for crypto-related money laundering. At the moment, only four South Korean exchanges have managed to secure real-name accounts for their clients. These are Upbit, Bithumb, Korbit, and Coinone.