South Korea's financial regulators plan to apply bank-level liability standards to domestic crypto exchanges, requiring platforms to compensate users for losses from hacks or system failures.
This move aims to increase accountability, mirroring obligations on banks, and could reshape risk-management practices across major exchanges like Upbit and Bithumb.
New Regulatory Framework for Crypto Exchanges
South Korea's Financial Services Commission (FSC) plans to apply bank-level, no-fault liability to crypto exchanges. This change means exchanges must compensate users for hack-related losses, regardless of fault, akin to obligations faced by banks.
The FSC and Financial Supervisory Service (FSS) are key in this regulatory move, supported by the National Assembly. They intend to enforce liability standards similar to those on banks, affecting major exchanges like Upbit and Bithumb.
Impact on Exchange Operations and Market Structure
The regulations will have immediate effects on cryptocurrency exchanges. Compliance costs are anticipated to rise as exchanges enhance their security systems. The move could also accelerate market consolidation, pressuring smaller exchanges to meet new standards.
Financially, the reform may impose significant fines—up to 3% of annual revenue—for hacking incidents. This liability increase pressures exchanges to invest in security and risk management, potentially raising operational costs.
These shifts will alter the operational landscape for crypto exchanges in South Korea. With heightened compliance demands, exchanges might revisit their business models and explore new partnerships to alleviate financial pressures.
Industry Precedent and Consumer Protection
Historical trends show a move towards bank-like accountability for VASPs in Korea. "The FSC is reviewing provisions that would require VASPs to compensate users for losses caused by hacking or system failures — regardless of whether the exchange is at fault, a standard currently applied only to financial institutions and electronic payment firms under the Electronic Financial Transactions Act." These changes could enhance consumer protection, influence global regulatory frameworks, and promote better security practices across the industry.