Crypto regulation in the world weekly digest #161

USA

The US Treasury is shifting its approach to the DeFi developers with a focus on illicit finance risks and regulatory compliance. The Department of Justice, part of the US government including the Treasury, updated its crypto enforcement policy in 2025 to reduce prosecution risks for open-source DeFi developers who do not have criminal intent. This means developers creating decentralized finance tools without intending wrongdoing, are less likely to face criminal charges, which has encouraged more innovation in the space. The policy prioritizes prosecuting actual criminal behavior over technicalities related to code use.

However, the Treasury is actively engaged in efforts to combat illicit finance risks in DeFi. The agency has been exploring integrations of digital identity verification into DeFi smart contracts as part of compliance tools to fight money laundering, terrorist financing, and sanctions evasion. This includes consultations on embedding KYC and AML checks directly in blockchain protocols, which has sparked debate over privacy and the permissionless nature of DeFi.

Thus, while enforcement against developers without criminal intent is being eased, the Treasury remains committed to regulating and overseeing DeFi to mitigate illicit uses. This balanced approach seeks to protect innovation while addressing financial crime risks through technology and regulatory frameworks like the GENIUS Act.

China

China is planning a significant policy shift by allowing the issuance of yuan-backed stablecoins for the first time. This move is aimed at boosting the international use and recognition of the yuan, aligning with efforts to counter the growing dominance of U.S. dollar-backed stablecoins in global transactions. The Chinese State Council, which serves as China’s cabinet, is set to review and potentially approve a roadmap in August 2025. This roadmap would include targets for the use of the yuan in international markets, roles for domestic regulators, and risk management measures regarding stablecoins. It marks a notable departure from China’s previous hard stance, where cryptocurrency trading and mining were banned over financial stability concerns.

The plan also envisions using yuan-backed stablecoins to facilitate cross-border trade and payments with some countries. Hong Kong and Shanghai are identified as priority hubs for rolling out this policy. This policy shift is also seen as a response to the competitive push from the United States in the development and adoption of stablecoins.

If the plan is approved, it would break a 12-year ban on crypto operations in China and potentially establish China as a stronger player in the digital currency space by expanding the yuan’s global presence without necessarily opening the country’s capital account fully or risking capital outflows.

Hong Kong has already enacted a comprehensive stablecoin ordinance effective August 1, 2025, allowing licensed entities to issue fiat-backed stablecoins under regulatory oversight, which may complement the mainland’s initiatives.

This development signals China's intention to enhance the yuan's internationalization through innovative digital currency mechanisms like stablecoins pegged to the yuan.

South Korea

South Korean centralized cryptocurrency exchanges have been ordered by the South Korean Financial Services Commission to immediately halt all crypto lending services starting August 19, 2025. This prohibition is aimed at controlling risky lending practices in the digital asset sector, as the regulator identified the lending products operating in a legal gray zone and posing significant risks to investors.

The ban requires exchanges to stop all lending operations involving fiat or crypto collateral until a proper regulatory framework is established. Existing lending contracts, such as repayments and maturity extensions, are allowed to continue, but no new lending services can be offered.

This regulatory move comes after exchanges like Upbit and Bithumb extensively rolled out aggressive lending programs in early July 2025, allowing leveraged borrowing (e.g., Upbit allowing loans of up to 80% of deposit value and Bithumb offering up to 4x leverage). Approximately 27,600 investors borrowed a total of about 1.5 trillion won (~$1.1 billion) within a month of these services launching. Around 13% of borrowers faced forced liquidation due to sharp market volatility. The FSC highlighted risks including significant investor losses and market disruptions, such as price instability in stablecoins linked to lending activities.

The suspension will last until South Korea formulates clear guidelines for crypto lending that include leverage limits, risk disclosures, and user eligibility. The FSC plans to conduct inspections and take action against platforms that do not comply with the ban.

News from other countries:

• Wyoming has become the first U.S. state to issue its own state-backed stablecoin, called the Frontier Stable Token (FRNT), officially launched in August 2025. This stablecoin is pegged 1:1 to the U.S. dollar and is fully reserved with backing by U.S. dollars and short-term U.S. Treasury bills, with a required 102% reserve volume mandated by state law.

• The Kyrgyzstan-issued ruble-pegged stablecoin A7A5 lost its 1:1 peg to the Russian ruble in August 2025 after U.S. and U.K. sanctions targeted entities and individuals linked to the stablecoin. The token's value dropped to about 0.60 rubles per A7A5 at its lowest point. Following this de-pegging, the A7A5 project team replaced the old smart contract with a new one to stabilize the price and ensure "fair and accurate pricing". Users were advised to stop transacting with the old contract to avoid losses, and a token swap was arranged based on a balance snapshot taken before the contract switch. By August 23, 2025, the stablecoin's value had partially recovered, trading around 0.96 rubles per token, near its original peg. The replacement of the wrapped A7A5 contract helped stabilize the currency after the shock from sanctions and the temporary loss of peg.

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