Key Highlights
- South Korea would enforce no-fault compensation rules on crypto exchanges after the Upbit hack.
- Exchanges would be treated like banks and may face fines up to 3% of annual revenue.
- The move addresses systemic security failures, including 20 system failures reported across major platforms since 2023.
The South Korean government is preparing rules to make cryptocurrency exchanges more financially liable, following a recent major security breach on Upbit, the country’s largest exchange. On Sunday, the Financial Services Commission (FSC) revealed its plans for a regulatory overhaul to impose bank-level, no-fault compensation rules on Virtual Asset Service Providers.
As per a report by the Korean Times, the proposed law aims to make the same consumer protection requirements for major crypto exchanges as the traditional finance players. The motivation for this regulatory about-face is the need for a stronger legal framework that would better protect consumers and enhance security standards in Korea’s fast-growing digital asset market.
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
