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South Korea is moving to impose bank-level liability standards on crypto exchanges following a $30.1 million hack at Upbit last month, shifting toward treating major platforms with the same regulatory rigor as traditional financial institutions.
According to The Korea Times, the Financial Services Commission is reviewing provisions that would require crypto exchanges to compensate users for losses caused by hacking or system failures, regardless of fault, mirroring rules currently applied only to banks and electronic payment firms under the country’s electronic financial transactions law.
The push follows a November 27 breach at Upbit that saw Solana-based tokens worth 44.5 billion won transferred to external wallets in just 54 minutes. Despite the incident, the exchange faced minimal penalties since regulators cannot order compensation under existing laws.
The planned reforms come amid a pattern of platform instability across Korea’s crypto sector.
Financial Supervisory Service data shows the five major exchanges—Upbit, Bithumb, Coinone, Korbit, and Gopax—recorded 20 system failures between 2023 and September 2024, affecting over 900 users with combined losses of 5 billion won (approximately $3.5 million).
Upbit alone accounted for six incidents, with more than 600 victims suffering 3 billion won in damages.
Draft legislation is expected to mandate IT security infrastructure plans, upgraded system standards, and significantly stronger penalties. Lawmakers are considering revisions that would allow fines of up to 3% of annual revenue for hacking incidents, matching standards for traditional financial institutions and replacing the current 5 billion won cap.
The shift would fundamentally reshape accountability in Korea’s crypto industry by making exchanges liable to compensate victims, just as banks must respond to security breaches or system failures.
The Upbit breach also exposed reporting failures. The exchange waited over six hours after detecting the hack at 5:00 a.m. to notify regulators at 10:58 a.m. Ruling party lawmakers alleged that Dunamu, Upbit’s parent company, deliberately delayed disclosure until after its scheduled merger with Naver Financial, which concluded at 10:50 a.m. Dunamu has not publicly responded to these allegations.
The regulatory tightening extends beyond security requirements into comprehensive anti-money laundering enforcement.
Korea’s Financial Intelligence Unit is preparing sanctions against major exchanges following on-site inspections that examined compliance with Know Your Customer checks and suspicious transaction reporting.
The unit has already disciplined Dunamu with a three-month suspension on new customer activity and a 35.2 billion won fine (approximately $24.7 million), setting a precedent for penalties expected to reach hundreds of billions of won across the sector.
Authorities are simultaneously expanding the crypto travel rule to apply to transactions under 1 million won, closing a loophole that allowed users to evade identity checks by splitting transfers into smaller amounts.
“We will crack down on crypto money laundering, expanding the Travel Rule to transactions under 1 million won,” Financial Services Commission Chairman Lee Eok-won said during a National Assembly briefing.
The Financial Intelligence Unit will gain pre-emptive account-freezing powers in serious cases, while new rules will bar individuals with convictions for tax crimes or drug offenses from becoming major shareholders in licensed platforms.
Legislative amendments are expected in the first half of 2026 as Korea aligns with global standards through expanded coordination with the Financial Action Task Force.
The enforcement drive unfolds as Korea’s long-delayed crypto tax regime faces potential postponement beyond its January 2027 start date due to persistent infrastructure gaps. Despite multiple deferrals since its 2020 approval, no significant updates to the framework have emerged.
Lawmakers have also set a December 10 deadline for the government to deliver a stablecoin regulatory framework, or face legislative action. Debates center on whether banks should lead issuance or whether fintech firms should participate more actively.
Financial Supervisory Service Governor Lee Chan-jin acknowledged the limits of current oversight despite the seriousness of the Upbit incident, stating that “regulatory oversight clearly has limits in imposing penalties” under existing law.
The planned reforms aim to close these gaps as Korea positions itself to compete with major economies that have already formalized comprehensive digital asset frameworks.
The new liability standards, combined with enhanced AML enforcement and expanded travel rule requirements, represent the most significant regulatory overhaul of Korea’s crypto sector since exchanges were first required to register with financial authorities in 2021.
Industry observers note that the stricter standards could push Korea toward becoming one of the most tightly regulated crypto markets globally, potentially setting precedents for other jurisdictions grappling with exchange security and consumer protection issues.
