South Korea to Regulate Crypto Exchanges Like Banks After Upbit Hack

South Korea is set to enforce bank-level liability standards on cryptocurrency exchanges after a significant hack at Upbit, where $30.1 million was stolen last month. This move represents a shift towards treating large crypto platforms with the same regulatory care as traditional banks.

Key Takeaways

South Korea is planning to regulate crypto exchanges similarly to banks, following a significant hacking incident at Upbit.
Proposed legislation would require exchanges to compensate users for losses due to hacking or system failures, regardless of fault.
A pattern of system failures has prompted the need for stricter regulatory standards across the crypto sector.
Enhanced penalties, updated reporting protocols, and expanded anti-money laundering measures are on the horizon.
South Korea is working to align its regulatory framework with global standards while addressing infrastructure challenges in the crypto space.

Korea to Treat Crypto Exchanges Like Banks After Upbit Hack

According to The Korea Times, the Financial Services Commission (FSC) is assessing new provisions that would mandate crypto exchanges to reimburse users for losses due to hacking or system failures, irrespective of fault. These new rules echo those already in place for banks and electronic payment firms under the country's electronic financial transactions law.

This initiative comes after a noteworthy incident on November 27, during which more than 104 billion Solana-based tokens, valued at approximately 44.5 billion won ($36 million), were rapidly transferred from Upbit to external wallets within just 54 minutes.

Despite this major breach, Upbit experienced minimal penalties because existing laws do not allow regulators to enforce compensation.

Growing Instability Spurs Regulatory Changes

The upcoming reforms arise from ongoing issues with system reliability across South Korea's cryptocurrency sector. Data from the Financial Supervisory Service indicates that major exchanges—Upbit, Bithumb, Coinone, Korbit, and Gopax—experienced 20 system failures from 2023 until September, affecting over 900 users and resulting in a total loss of 5 billion won.

Upbit was particularly affected, reporting six incidents that harmed around 600 users, who collectively incurred damages of 3 billion won.

Proposed legislation is likely to require robust IT security infrastructure, enhanced system standards, and much stricter penalties. Lawmakers are contemplating changes that would impose fines up to 3% of annual revenue for hacking events, aligning with traditional financial institutions while replacing the current penalty cap of 5 billion won.

This reform would drastically alter responsibility in Korea's cryptocurrency landscape, making exchanges accountable for compensating victims similarly to the obligations of banks after security breaches or system failures.

Additionally, the Upbit incident uncovered serious shortcomings in reporting practices. The exchange took over six hours to inform regulators about the breach, having first detected it at 5 a.m. and only notifying them at 10:58 a.m. Lawmakers from the ruling party accused Dunamu, Upbit’s parent company, of intentionally delaying this notification until after its merger with Naver Financial, which concluded at 10:50 a.m.

Expanding Compliance Measures Across the Industry

The tightening of regulations is not limited to security but also includes stricter anti-money laundering measures. The Financial Intelligence Unit (FIU) is preparing sanctions against significant exchanges following inspections focused on compliance with Know Your Customer (KYC) protocols and suspicious transaction reporting.

Dunamu has already faced a three-month suspension on new customer activities and a fine of 35.2 billion won, which could set a precedent leading to penalties that may reach into the hundreds of billions of won across the sector.

In an effort to close loopholes that allowed users to avoid identity verification by dividing transactions into smaller amounts, authorities are expanding the crypto travel rule to apply to transactions below 1 million won. "We will crack down on crypto money laundering and expand the Travel Rule to transactions under 1 million won," stated Lee Eok-won, Chairman of the FSC, during a National Assembly briefing.

The FIU will also have pre-emptive powers to freeze accounts in severe cases, and new regulations will prevent individuals with convictions for tax or drug crimes from becoming major stakeholders in licensed platforms.

Legislative updates are anticipated in the first half of 2026 as South Korea seeks to align itself with international standards through enhanced collaboration with the Financial Action Task Force (FATF).

As South Korea continues to implement these measures, its long-discussed crypto tax framework faces possible delays beyond its planned January 2027 launch due to ongoing infrastructure challenges. Lawmakers also set a December 10 deadline for the government to establish a regulatory framework for stablecoins, or risk legislative intervention regarding whether banks or fintech companies should take the lead in their issuance.

Sarah Lee, Governor of the Financial Supervisory Service, acknowledged the limitations of current regulatory oversight following the severity of the Upbit breach, stating, "Regulatory oversight clearly has limits in enforcing penalties under existing laws." However, the proposed reforms aim to fill these gaps and pave the way for South Korea to enhance its competitiveness with major economies that have embraced comprehensive frameworks for digital assets.