Upbit Hack Forces Korea’s Hand: Stricter Exchange Liability Rules Now on the Table
After the Upbit breach, South Korean regulators are done asking nicely. They're drafting rules that would make crypto exchanges legally liable for customer losses from hacks—a move that could reshape the entire industry's risk calculus.
The Regulatory Hammer Drops
Forget voluntary guidelines. The Financial Services Commission (FSA) is reportedly crafting mandatory standards that would place the financial burden of security failures squarely on trading platforms. The message is clear: safeguard user assets or pay the price. This shifts the paradigm from 'buyer beware' to 'custodian beware.'
Exchanges Face a New Reality
The proposed framework would treat major exchanges more like traditional financial custodians. That means mandatory proof of reserves, stricter insurance requirements, and real-time audit trails. Operational security is no longer just a feature—it's the core product. Platforms cutting corners on cold storage or multi-sig protocols could find themselves on the hook for millions.
Market Ripples and Reckonings
While aimed at protecting users, the rules could trigger a brutal consolidation. Smaller exchanges lacking the capital for fortress-level security may fold or merge. For survivors, compliance costs will soar, potentially squeezing margins in a famously competitive arena—though perhaps that's the point. It's the old finance playbook: regulate until only the too-big-to-fail remain, then act surprised about the lack of competition.
Korea's crackdown signals a global trend: the freewheeling days of crypto are giving way to an era of accountability. Whether this breeds stronger institutions or just creates a new class of bureaucratic gatekeepers remains to be seen. One thing's certain—the industry's 'move fast and break things' mantra just got a lot more expensive.
Korean government wants to improve oversight in the crypto industry
According to the reports, the Financial Services Commission (FSC) is looking into provisions that will require Korean VIRTUAL assets providers or exchanges to compensate users for losses caused by hacks or system failures. The new development is coming regardless of whether the exchange is at fault. This no-fault standard is currently applied to financial firms and electronic payments firms under the law governing financial transactions.
The new development, according to the report, was propelled by the November 27 hack incident involving Upbit. The incident saw more than 104 billion Solana-based tokens, which were roughly about 44.5 billion won ($30.1 million), moved to external wallets within minutes. The scammers stole several tokens, including Bonk, Solana, Pudgy Penguins, and the OFFICIAL TRUMP token. However, despite the breach, the exchange has faced little to no penalties.
This is because regulators cannot order the exchange to compensate victims of the hack under the current law. With the new update, the FSC WOULD have the power to make crypto exchanges liable for compensating victims, following the same obligations that financial entities face if they become victims of hacks or system failures. The move is also coming amid several system failures across the crypto sector.
Lawmakers set to release updated draft regulations
In data submitted by the Financial Supervisory Service (FSS) to lawmakers, the five major Korean crypto exchanges, Upbit, Bithumb, Coinone, Korbit, and Gopax, recorded a cumulative 20 system failures from 2023 through September 2025. The incidents affected more than 900 users, with a combined 5 billion won recorded as losses from the incidents. Upbit accounted for six of the incidents, with more than 600 victims affected in a combined 3 billion won worth of losses.
The draft legislation is expected to include requirements that will strengthen security, including mandatory IT security infrastructure plans, significantly stronger penalties, and upgraded standards for systems and personnel. Lawmakers are currently looking into a revision that would allow firms to pay fines of up to 3% of their annual revenues for hacking incidents at crypto exchanges, the same standards that traditional financial institutions follow.
Currently, the maximum fine for crypto exchanges is capped at 5 billion won. Meanwhile, the Upbit incident has also raised issues related to delayed reporting. According to reports, the hack was detected around 5 AM on November 27, but Upbit failed to report it to the FSS until 10:58 AM, a difference of six hours. As a result, some Korean lawmakers claimed that the exchange deliberately withheld the information until after a scheduled merger of Dunamu and Naver Financial was finalized.
As a result, the FSS is looking into the breach, but reports noted that the exchange may not be sanctioned heavily. FSS Governor Lee Chan-Jin noted the seriousness of the incidents and the limits of current oversight. “The hacking is not something we can overlook. However, regulatory oversight clearly has limits in imposing penalties,” he said.
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