South Korea Plans Bank-Level Liability Rules for Crypto Exchanges

South Korea prepares to impose bank-level liability rules. This forces crypto exchanges to compensate users for losses, regardless of the cause.

South Korea is preparing to impose bank-level, no-fault liability rules on crypto exchanges. This imposes the same stringent standards on exchanges as conventional financial institutions. The recent breach at Upbit brought this regulatory shift into effect.

Regulatory Shift Imposes Strict Financial Standards

The Financial Services Commission (FSC) is looking at new provisions. These provisions would have exchanges compensate their customers for losses. This includes losses owing to hacks or system failures. Importantly, this is needed even though the platform is not at fault. This development was reported by the Korea Times on Sunday.

The move certainly indicates that there is a shift in the regulatory focus. It takes major crypto exchanges as seriously as traditional financial platforms. Furthermore, it exercises similar scruples over compliance and consumer protection. It also deals with the overall regulatory guidelines of the booming Korean crypto market.

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The FSC is looking at reviewing these provisions. They particularly target Virtual Asset Service Providers (VASPs). They would require compensation for losses due to hacking or system failure. This obligation remains irrespective of whether the exchange is found to be at fault.

This no-fault standard currently applies only to financial institutions. It also includes electronic payment companies. This is provided in the law concerning electronic financial transactions. Thus, the proposed change levels the playing field quite a lot.

The regulatory push comes right on the heels of a November 27 Upbit incident. There were more than 104 billion Solana-based coins involved. These assets, amounting to about 44.5 billion won or $30.1 million, were transferred from outside. This transfer took place in only 54 minutes.

Despite the huge breach, the exchange has not been subjected to many formal punishments. Regulators cannot order compensation at this time, using the existing law. This leaves a huge regulatory loophole.

Upbit Incident Drives Urgent Need for Compensation Mandate

The proposed draft legislation is expected to provide enhanced requirements. This encompasses mandatory IT security infrastructure plans. Moreover, it demands high-end standards for the systems and another for the personnel. It also puts much stiffer penalties in place for not complying.

Lawmakers are under consideration of revising it. This would provide a fine of up to 3% of annual revenue for hacking events. This is applied to the same standard given to traditional financial institutions. The existing fine for crypto exchanges is currently up to 5 billion won.

Trust in safety and system security is still essential. Financial Supervisory Service Chairman Lee Chan-jin made clear of this point clear recently. He said that they are strengthening this part in the second phase of virtual asset legislation.

Consequently, this second phase is expected to reflect a large part of the present monetary law. This includes the obligation to obtain safety and reliability. It also includes measures for much stiffer fines.

Exchanges have standards that need to be met for manpower and facilities. They also have to set up an IT plan every year. In turn, they must submit this to the FSC. This provides oversight on the operational security.

Therefore, this regulatory action has the purpose of enhancing investor confidence. It makes exchanges focus on good cybersecurity practices. This is critical to the long-term sustainability of the industry. The move represents a critical South Korean digital asset sector.

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