South Korea Closes Regulatory Gaps After Upbit Breach
South Korea's financial regulators are slamming the door on crypto security loopholes—and the timing couldn't be more pointed.
The Wake-Up Call
When a major exchange gets hit, it's never just about the stolen funds. It's a flashing red signal to every regulator watching. South Korea's Financial Services Commission (FSA) is now rolling out a sweeping set of mandates, forcing exchanges to fortify their digital vaults. Think mandatory cold storage ratios, real-time transaction monitoring, and stress tests that would make a traditional bank blanch.
Beyond the Firewall
The new rules dig deeper than just tech. They're imposing stricter capital requirements and demanding transparent proof of reserves. It's a move that directly targets the 'trust-me' culture that sometimes lingers in crypto's wilder corners. For local traders, it means more paperwork for exchanges but, theoretically, a safer trading environment.
The Global Ripple Effect
Seoul's crackdown isn't happening in a vacuum. From Japan's FSA to Singapore's MAS, Asia's financial watchdogs are in a quiet race to become the region's most reputable crypto hub. Tough love is the new competitive strategy. It's a stark contrast to the laissez-faire approaches that have blown up in other jurisdictions—leaving taxpayers, as always, holding the bag for someone else's risky bet.
This regulatory sprint turns every hack into a catalyst. The industry's path to legitimacy is being paved with broken code and lost keys, proving that sometimes, the market needs a push toward security it won't build for itself.
Mandatory no-fault compensation
Under the bill being discussed with the FSC, VIRTUAL Asset Service Providers (VASPs) would be obligated to reimburse users’ losses resulting from system breakdowns or hacking, regardless of whether such breakdowns or hacking are attributed to negligence on the part of the exchange.
No-fault liability already applies to electronic payment companies and financial institutions under the law governing electronic financial transactions, meaning crypto platforms will fall under an updated set of regulatory requirements.
The push for this regulatory change was the public security compromise at Upbit on November 27. This included about 104 billion Solana-based coins valued at about 44.5 billion won ($30.1 million) that were transferred to external wallets in 54 minutes.
Despite the size of the breach, regulators are somewhat hamstrung; under current law, they are unable to issue orders compelling the exchange to provide restitution to those affected, meaning penalties against the platform are minimal.
Widespread system failures
The incident shows that the problem lies with the systemic issues in the sector. According to data from the Financial Supervisory Service (FSS), the five major crypto exchanges, Upbit, Bithumb, Coinone, Korbit, and Gopax, have reported a total of 20 system failures between 2023 and September 2025, affecting over 900 users and causing total losses amounting to 5 billion won. Upbit alone accounted for six incidents, with over 600 victims suffering combined losses of 3 billion won.
A related concern stemming from the Upbit breach involved scrutiny of internal reporting protocols at the exchange itself. Though reportedly having detected the hack around 5 a.m., Upbit did not notify the FSS until 10:58 a.m.
The timing spurred accusations by some ruling party lawmakers that Upbit tried to keep the information under wraps until after a planned merger between Dunamu, the operator behind Upbit, and Naver Financial wrapped up at 10:50 a.m.
Limits of current oversight
FSS Governor Lee Chan-jin acknowledged the challenges imposed by the current regulatory ceilings, stating, “The hacking is not something we can overlook. However, regulatory oversight clearly has limits in imposing penalties.”
The proposed law is likely to bring about regulatory adjustments for crypto exchanges. In addition to compulsory, no-blame compensation, the draft law is expected to tighten up operational standards, including compelling detailed plans for IT security infrastructure and raising standards for the systems, as well as for personnel staffing at the exchanges.
The law targets increased financial accountability with stronger penalties. For instance, South Korea is considering a revision that allows regulators to fine crypto exchanges up to three percent of their annual revenue in case of hacking incidents. The structure of this penalty is no different from what traditional financial institutions currently face, replacing the current maximum fine cap for crypto exchanges of 5 billion won.
The MOVE will raise the financial risk for exchanges unable to adequately secure their platforms. The immediate response of the government toward greater regulation of Virtual Asset Service Providers shows its efforts to close regulatory gaps exposed by the Upbit incident and similar smaller system failures.
Also Read: Upbit Urges Users to Create New Deposit Wallets in Wake of $37M Hack
