- South Korea plans to impose strict liability rules on exchanges.
- New regulations aim to hold crypto platforms accountable for hacks.
- Upbit breach sparks tighter oversight and no-fault compensation laws.
South Korea is set to introduce sweeping new regulations that will require cryptocurrency exchanges to be held liable for user losses caused by hacks, much like traditional financial institutions. The Financial Services Commission (FSC) is reviewing provisions that would enforce a no-fault compensation system for exchanges, ensuring that they compensate customers even when the platform itself is not directly at fault.
Currently, this type of liability is only applicable to banks and electronic payment firms under the Electronic Financial Transactions Act.
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This regulatory overhaul follows a massive breach at Upbit, one of South Korea’s largest crypto exchanges. On November 27, hackers transferred over 104 billion Solana-based tokens, worth around 44.5 billion won ($30.1 million), to external wallets in less than an hour. The incident has drawn significant attention to the security weaknesses within the cryptocurrency sector, prompting a push for more stringent regulations.
Strengthening Oversight and Penalties for Exchanges
In addition to implementing no-fault compensation, South Korean regulators are seeking to strengthen oversight on exchanges due to a series of ongoing technical failures. Since the beginning of 2023, the country’s five major exchanges Upbit, Bithumb, Coinone, Korbit, and Gopax—have reported 20 system failures, impacting more than 900 users and resulting in losses exceeding 5 billion won.
Upbit alone accounted for six of these failures, affecting over 600 customers.
To tackle these issues, the upcoming legislative revisions are expected to impose tougher IT security requirements, higher operational standards, and stronger penalties for exchanges involved in breaches. Lawmakers are considering fines of up to 3% of annual revenue for exchanges that experience hacks, bringing them in line with penalties faced by banks.
Currently, crypto exchanges face a maximum fine of 4.5 billion won ($3.4 million) for such incidents.
Political Scrutiny and Stablecoin Bill Push
The Upbit breach has also sparked political scrutiny, particularly regarding the delayed reporting of the hack. Although the breach was detected shortly after 5 a.m., the exchange did not notify the Financial Supervisory Service (FSS) until nearly six hours later. This delay has led some lawmakers to question whether the delay was intentional, especially since it coincided with the finalization of Dunamu’s merger with Naver Financial.
Furthermore, South Korean lawmakers are pushing for progress on a long-awaited stablecoin bill. They are demanding that financial regulators present a draft by December 10, warning that they will proceed without the government if the deadline is missed.
The shift toward imposing bank-level regulations on crypto exchanges is a significant step in ensuring greater consumer protection and accountability in the cryptocurrency industry. The changes are expected to reshape the way exchanges operate, with a greater focus on security, transparency, and timely reporting.
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