Korea to Treat Crypto Exchanges Like Banks After Upbit Hack – A Regulatory Reckoning

South Korea slams the regulatory hammer down. In a seismic shift following the Upbit security breach, authorities are drafting rules that would place cryptocurrency exchanges under the same stringent oversight as traditional banks.

The New Guardrails

Forget the wild west. The proposed framework mandates capital reserve requirements, real-time transaction monitoring, and strict customer verification protocols—mirroring the playbook used for commercial banks. It's a direct response to vulnerabilities exposed by the hack, aiming to lock down the digital vaults holding billions in investor assets.

Why This Changes Everything

This isn't just another compliance update. Treating exchanges like banks fundamentally alters their operational DNA. It forces them to prioritize security and stability over growth-at-all-costs, potentially squeezing out smaller players who can't meet the new capital demands. Liquidity could consolidate into a handful of fortified, bank-like institutions.

The Market's Mixed Signals

Initial knee-jerk sell-offs gave way to a cautious rally among major tokens. The sentiment? Brutal short-term pain for long-term legitimacy. Investors are betting that draconian oversight, while a hassle, could finally lure the institutional capital that's been circling the crypto space but wary of its cowboy reputation. After all, nothing makes a traditional financier more comfortable than rules, red tape, and the occasional cynical fee for simply holding your money.

The global regulatory race just found its pace car. Korea's move pressures other nations to clarify their stance, potentially creating a new tier of 'compliant' crypto hubs. For the industry, the message is clear: grow up or get out.

Mounting System Failures Drive Regulatory Overhaul

The planned reforms come amid a pattern of platform instability across Korea’s crypto sector.

Financial Supervisory Service data shows the five major exchanges, Upbit, Bithumb, Coinone, Korbit, and Gopax, recorded 20 system failures between 2023 and September this year, affecting over 900 users with combined losses of 5 billion won.

Upbit alone accounted for six incidents, with more than 600 victims suffering 3 billion won in damages.

Draft legislation is expected to mandate IT security infrastructure plans, upgraded system standards, and significantly stronger penalties.

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 and replacing the current 5 billion won cap.

The shift would fundamentally reshape accountability in Korea’s crypto industry by making exchanges liable to compensate victims, as banks must respond to security breaches or system failures.

The Upbit breach also exposed reporting failures, with the exchange waiting over six hours after detecting the hack at 5 a.m. to notify regulators at 10:58 a.m.

Ruling party lawmakers alleged that Dunamu deliberately delayed disclosure until after its scheduled merger with Naver Financial, which concluded at 10:50 a.m.

Broader Compliance Crackdown Intensifies Across Industry

The regulatory tightening extends beyond security requirements into comprehensive anti-money laundering enforcement.

Korea’s Financial Intelligence Unit is preparing sanctions against major exchanges following on-site inspections that examined compliance with Know Your Customer checks and suspicious transaction reporting.

The unit has already disciplined Dunamu with a three-month suspension on new customer activity and a 35.2 billion won fine, setting a precedent for penalties expected to reach hundreds of billions of won across the sector.

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 into smaller amounts.

“We will crack down on crypto money laundering, expanding the Travel Rule to transactions under 1 million won,” Financial Services Commission Chairman Lee Eok-won said during a National Assembly briefing.

The Financial Intelligence Unit will gain pre-emptive account-freezing powers in serious cases, while new rules will bar individuals with convictions for tax crimes or drug offenses from becoming major shareholders in licensed platforms.

Legislative amendments are expected in the first half of 2026 as Korea aligns with global standards through expanded coordination with the Financial Action Task Force.

South Korean crypto tax may face a fourth delay to 2027 as proposed amendments fail to address framework issues. #CryptoTax #SouthKoreahttps://t.co/L0vuIlvbSu

The enforcement drive unfolds as Korea’s long-delayed crypto tax regime faces potential postponement beyond its January 2027 start date due to persistent infrastructure gaps, with no significant updates to the framework despite multiple deferrals since its 2020 approval.

Recently, lawmakers also set a December 10 deadline for the government to deliver a stablecoin regulatory framework, or face legislative action, with debates centering on whether banks should lead issuance or whether fintech firms should participate more actively.

Financial Supervisory Service Gov. Lee Chan-jin acknowledged the limits of current oversight despite the seriousness of the Upbit incident, stating that “regulatory oversight clearly has limits in imposing penalties” under existing law.

However, with the planned reforms, it aims to close these gaps as Korea positions itself to compete with major economies that have already formalized comprehensive digital asset frameworks.