Strengthening Consumer Protection in the Digital Asset Market
South Korea is preparing to impose bank-level, no-fault liability rules on crypto exchanges. This move is intended to ensure platforms compensate customers for losses stemming from hacks or system failures, even when the exchange itself is not directly at fault. The Financial Services Commission is currently reviewing provisions that would align these compensation standards with those of traditional financial institutions.
This proposed regulatory framework is designed to hold exchanges to the same compensation standards as traditional financial institutions. The no-fault compensation model is currently applied to banks and electronic payment firms under Korea's Electronic Financial Transactions Act, highlighting a significant disparity in consumer protection between traditional finance and the cryptocurrency sector.
Addressing the Upbit Hacking Incident and Industry-Wide Vulnerabilities
The regulatory push is a direct response to a significant incident that occurred on November 27th at Upbit, a major cryptocurrency exchange operated by Dunamu. In this breach, over 104 billion Solana-based tokens, valued at approximately 44.5 billion won, were transferred to external wallets within a short timeframe. This event starkly exposed major gaps in consumer protection for crypto users when compared to the safeguards available to traditional banking customers.
Regulators are also taking into account a pattern of recurring system outages across major exchanges. Data provided to lawmakers by the Financial Supervisory Service indicates that the country's five principal exchanges reported a total of 20 system failures since 2023. These failures affected over 900 users and resulted in combined losses exceeding 5 billion won. Upbit alone experienced six such failures during this period, impacting 600 customers, which has prompted serious questions about the operational standards and infrastructure investment within the broader cryptocurrency industry.
Proposed Legislative Revisions and Enhanced Penalties
The forthcoming legislative revision is anticipated to mandate stricter IT security requirements and higher operational standards for cryptocurrency exchanges. Furthermore, the new regulations are expected to introduce tougher penalties for non-compliance and security breaches. Lawmakers are considering a rule that would permit fines of up to 3% of an exchange's annual revenue in the event of hacking incidents, mirroring the threshold currently applied to banks. This contrasts with the current maximum fine of $3.4 million that crypto exchanges face.
The Upbit breach has also drawn significant political scrutiny regarding the timing of its reporting. While the hack was detected shortly after 5 a.m. UTC+9, the exchange did not formally notify the Financial Supervisory Service until nearly 11 a.m. Some lawmakers have raised allegations that this delay was intentional, occurring mere minutes after Dunamu finalized a merger with Naver Financial, suggesting a potential attempt to manage the fallout.
Push for Stablecoin Legislation
In parallel with the efforts to enhance exchange liability, South Korean lawmakers are actively pressuring financial regulators to deliver a draft stablecoin bill by December 10th. They have warned that if this deadline is missed, they will proceed with legislative action independently of the government. This ultimatum from the ruling party follows a period of slow progress and repeated delays in the development of stablecoin regulations.
Officials are hopeful that the stablecoin bill will be brought to debate during the National Assembly's extraordinary session scheduled for January 2026. These combined regulatory initiatives signal South Korea's firm intention to establish comprehensive oversight of the digital asset market, particularly in the wake of high-profile security incidents that have underscored the need for robust consumer protection and market stability.