South Korea is preparing to impose bank-level obligations on crypto exchanges following a significant security breach at Upbit, the country's largest platform, which resulted in approximately $30 million in losses. The incident exposed serious security lapses, prompting regulatory action from the Financial Services Commission (FSC).
The FSC announced that crypto exchanges may face new requirements, including no-fault liability, stricter IT risk standards, expanded audit criteria, and fines tied to revenue. These measures are intended to enhance the security posture of virtual asset service providers in the country.
The Upbit hack, which occurred on November 27, is suspected to have been carried out by North Korea's Lazarus Group. This attack is part of a concerning trend of AI-enhanced cyberattacks increasingly targeting Korean businesses and financial institutions.
"Lazarus group has proven that they are very dynamic and they will change and adapt with the times when new technologies like cryptocurrency come out there already on top of it," stated Robert Sanchez, an expert in financial crime management.
Impersonation Tactics Enhanced by AI
The attack on Upbit likely involved compromised administrator credentials, suggesting internal operational weaknesses rather than direct vulnerabilities in the blockchain technology itself. This highlights the importance of internal security protocols and employee training.
Robert Sanchez explained that modern attackers often spend considerable time "stalking" potential targets on professional networking sites like LinkedIn. This reconnaissance phase allows them to identify key personnel within an organization.
"They’ll identify the administrators and may even use AI to support their fraudulent activity," Sanchez elaborated. "They gradually gather information sometimes by impersonating employees and work to reverse-engineer access to reach the protected private keys of crypto accounts."
A Wake-Up Call for Regulatory Frameworks
Chan-jin Lee, Governor of the Financial Supervisory Service (FSS), emphasized that Upbit's security shortcomings underscore the necessity for South Korea to advance with the second phase of revisions to the Virtual Asset User Protection Law, which was introduced in July 2024. He noted that the current legislation does not hold service providers fully accountable for security failures.
According to the FSS, Upbit delayed alerting authorities to the breach for six hours. South Korean lawmakers have criticized the exchange, suggesting the delay was intended to avoid overshadowing its high-profile merger with internet giant Naver.
"System security is the lifeline of virtual assets," Chan-jin Lee remarked, adding that the proposed amendment aims to introduce a regulatory structure comparable to the Capital Markets Act.
Heightened Scrutiny for Crypto Exchanges
This is not the first time Upbit has been targeted by the Lazarus Group, which is linked to North Korea. On November 26, 2019, hackers stole approximately $49 million from hot wallets. Upbit clarified at the time that these losses did not impact user accounts.
This incident is part of a larger pattern of cyber threats. A report by AhnLab's 2025 Cyber Threat Trends & 2026 Outlook, published on November 27, documented a total of 86 North Korea-related cyber hacking activities between October of the previous year and September of the current year.
President Jae Myung Lee has called for increased penalties for corporate negligence in data breaches. Hoon-sik Kang, his chief of staff, criticized Upbit for managing its IT security budget on an ad hoc basis and for lacking a dedicated budget specifically for cybersecurity.
Upbit has stated its intention to fully reimburse customers for their stolen funds and has reportedly frozen $1.77 million in assets linked to the breach. The exchange has committed to tracing the theft and recovering the stolen assets.
However, tracing stolen funds presents significant challenges, as the Lazarus Group is known for employing sophisticated tools designed to evade detection by authorities.
"Crypto mixers are designed to jumble transactions and sever the paper trail," explained financial crime expert Robert Sanchez. "Lazarus is known for using them routinely, even though progress is being made to deanonymize the technology."
Steeper Operational Burdens on the Horizon
South Korea is considering implementing a no-fault liability rule. This would require exchanges to reimburse customers for losses even when the platforms are not directly responsible for a breach. This type of liability is a standard requirement for banks and financial institutions in Korea but has not traditionally applied to crypto exchanges.
Under this proposed rule, the government could fine crypto exchanges up to 3% of their annual revenue in the event of a hack. These penalties are designed to compel the industry to prioritize security more effectively.
However, South Korea's cryptocurrency industry is already facing challenges in achieving commercial feasibility for digital assets.
"Many altcoins, aside from Bitcoin, still lack a clear purpose, and the businesses associated with them are not doing well," observed Louis Ko, CEO of Bitcoin startup Nonce Lab. "Some projects survive on investments, but this is not sustainable."
Ko suggested that South Korea's push to hold exchanges financially responsible for hacks could lead to smaller platforms exiting the market.
"The crypto market in Korea is still very small. Except for a few large exchanges, most crypto businesses are struggling to create real value for customers."
He further noted that current crypto regulations mandate that any crypto-related business must meet the same stringent requirements as a crypto exchange.
"The minimum security standard, the ISMS, costs about 100 million KRW (USD 75,000) each year to maintain. Most entrepreneurs in this sector need this level of capital to even begin operating."
South Korea requires major online service providers to adhere to a government-backed cybersecurity regime known as the Information Security Management System (ISMS).
Ko expressed concern that the uncertainty, compounded by South Korea's tightening regulatory environment, could prompt some crypto firms to seek opportunities abroad or accelerate underground trading activities. He pointed to a trend where altcoin projects have issued tokens through illegal channels, resulting in pyramid-style sales structures and significant investor losses.
Legislative amendments are anticipated in the first half of 2026 as South Korea strengthens its security and Anti-Money Laundering (AML) rules through expanded coordination with the Financial Action Task Force (FATF).
Robert Sanchez emphasized that education remains a crucial defense against evolving threats.
"Impersonation and spear-phishing remain among the most common tactics used by attackers, so training and education in these areas should be standard practice for any organization," he advised. "This requires robust and well-defined internal procedures to counter these threats."