South Korea Mandates Bank-Level Liability for Crypto Exchanges Following Upbit Hack

South Korea is set to implement stringent regulations for cryptocurrency exchanges, requiring them to adhere to bank-level, no-fault liability standards. This significant regulatory shift follows a major security breach at the Upbit exchange, prompting authorities to bolster consumer protection measures within the digital asset market.

Key Takeaways

South Korea's Financial Services Commission (FSC) is reviewing new rules to hold crypto exchanges accountable for customer losses due to hacks or system failures, regardless of fault.
This "no-fault" compensation model mirrors existing regulations for banks and electronic payment firms.
The move is a direct response to a recent hack on Upbit and a pattern of recurring system failures across major exchanges.

Enhanced Regulatory Oversight

The Financial Services Commission (FSC) is reportedly considering new provisions that would compel cryptocurrency exchanges to compensate users for losses incurred from hacks or system malfunctions, even if the exchange itself is not deemed at fault. This proposed "no-fault" compensation model is currently applied to traditional financial institutions like banks and electronic payment providers under South Korea's Electronic Financial Transactions Act.

Response to Security Incidents

This regulatory tightening comes in the wake of a significant security incident on November 27, where the Upbit exchange, operated by Dunamu, experienced a breach resulting in the transfer of over 104 billion Solana-based tokens, valued at approximately $30.1 million, to external wallets within an hour.

Furthermore, data submitted to lawmakers by the Financial Supervisory Service (FSS) reveals a concerning trend of system failures. South Korea's five major exchanges – Upbit, Bithumb, Coinone, Korbit, and Gopax – have reported a total of 20 system failures since the beginning of 2023. These incidents have affected over 900 users and resulted in combined losses exceeding 5 billion won, with Upbit alone accounting for six failures impacting 600 customers.

Stricter Security and Penalties

The anticipated legislative revisions are expected to introduce more rigorous IT security requirements, elevate operational standards, and impose harsher penalties for non-compliance. Lawmakers are exploring the possibility of imposing fines of up to 3% of annual revenue for hacking incidents, aligning with the penalties faced by banks. Currently, crypto exchanges are subject to a maximum fine of $3.4 million.

The Upbit hack also highlighted concerns regarding delayed reporting. Despite detecting the breach shortly after 5 am, Upbit did not inform the FSS until nearly 11 am. This delay has led to accusations from some lawmakers that it may have been intentional, occurring shortly after Dunamu finalized a merger with Naver Financial.

Broader Regulatory Landscape

In parallel, South Korean lawmakers are actively pushing for the delivery of a stablecoin bill by December 10, signaling their intent to proceed with legislation even if the government misses the deadline. This push for a stablecoin bill underscores the government's broader efforts to regulate the cryptocurrency space more comprehensively.

Sources

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