South Korea is preparing to impose bank-level, no-fault liability standards on cryptocurrency exchanges following Upbit's $30 million security breach, shifting regulatory oversight to match traditional financial institutions.
The Financial Services Commission is reviewing provisions that would require exchanges to compensate users for losses caused by hacking or system failures regardless of fault, according to The Korea Times.
The regulatory push follows a November 27 incident at Upbit, South Korea's largest cryptocurrency exchange, in which more than 104 billion Solana-based tokens worth 44.5 billion won were transferred to external wallets in under an hour.
What Happened
Upbit detected abnormal withdrawal activity around 4:42 a.m. on November 27, when Solana network assets including SOL, USDC, BONK and RENDER were moved to unknown addresses.
The exchange suspended deposits and withdrawals immediately after detecting the unauthorized transfers.
Dunamu, Upbit's parent company, confirmed customer losses totaling approximately 38.6 billion won, with an additional 2.3 billion won frozen.
The exchange pledged to cover all losses from its own reserves.
The breach drew political scrutiny over delayed reporting.
Although the hack was detected shortly after 5 a.m., Upbit did not notify the Financial Supervisory Service until 10:58 a.m., more than six hours later.
Ruling party lawmakers alleged Dunamu deliberately withheld information until after its scheduled merger with Naver Financial concluded at 10:50 a.m.
The $10.3 billion stock swap represents one of South Korea's largest fintech consolidations.
An emergency audit uncovered a vulnerability in Upbit's internal wallet system that could have allowed attackers to derive private keys by analyzing blockchain transactions.
South Korean authorities suspect North Korea's Lazarus Group orchestrated the attack using techniques similar to a 2019 breach.
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The incident occurred exactly six years after Upbit lost 342,000 Ethereum tokens in a hack attributed to North Korean state-sponsored hackers.
Why It Matters
The proposed regulatory framework would fundamentally reshape accountability in South Korea's cryptocurrency industry by mandating no-fault compensation, a standard currently applied only to banks and electronic payment firms under the Electronic Financial Transactions Act.
Financial Supervisory Service data shows the five major exchanges - Upbit, Bithumb, Coinone, Korbit and Gopax - recorded 20 system failures between 2023 and September 2025, affecting more than 900 users with combined losses exceeding 5 billion won.
Upbit alone accounted for six incidents impacting 600 customers with 3 billion won in damages.
Lawmakers are considering revisions that would allow fines of up to 3 percent of annual revenue for hacking incidents, matching standards for traditional financial institutions.
Currently, cryptocurrency exchanges face a maximum fine of 5 billion won.
The draft legislation is expected to mandate IT security infrastructure plans, upgraded system standards and significantly stronger penalties.
The changes would require exchanges to implement bank-level cybersecurity measures and maintain adequate reserves to cover potential customer losses.
South Korea's Financial Intelligence Unit previously imposed a 35.2 billion won fine on Dunamu alongside a three-month suspension on new customer onboarding for anti-money laundering violations.
The unit discovered approximately 5.3 million customer verification failures and 15 unreported suspicious transactions during inspections.
Authorities are simultaneously expanding the crypto travel rule to apply to transactions under 1 million won, closing a loophole that allowed users to evade identity checks by splitting transfers.
The Financial Intelligence Unit will gain pre-emptive account-freezing powers in serious cases.
Financial Supervisory Service Governor Lee Chan-jin acknowledged current regulatory limitations, stating that "regulatory oversight clearly has limits in imposing penalties" under existing law.
The planned reforms aim to close these gaps as South Korea positions itself to compete with major economies that have formalized comprehensive digital asset frameworks.
Legislative amendments are expected in the first half of 2026 as South Korea aligns with global standards through expanded coordination with the Financial Action Task Force.
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