Strengthening Consumer Protections in Cryptocurrency
In a decisive move to strengthen consumer protections in the cryptocurrency sector, South Korea is set to impose new regulations on digital asset exchanges, drawing parallels to the standards upheld by traditional banks. This development follows a significant security breach at Upbit, a prominent cryptocurrency exchange in the country, which has raised serious concerns about the adequacy of existing safeguards in the rapidly evolving digital currency market.
Proposed No-Fault Compensation Framework
The Financial Services Commission (FSC) of South Korea is currently evaluating the introduction of a no-fault compensation framework for cryptocurrency exchanges and other providers of virtual assets. Under this proposed rule, these entities would be obligated to reimburse users for losses resulting from hacking incidents or operational failures, irrespective of whether any wrongdoing on the part of the exchange is established. This level of obligation is consistent with regulations already in place for conventional financial institutions and electronic payment service providers.
Recent Hacking Incident at Upbit
This regulatory reconsideration comes in light of a hacking incident reported in late November at Upbit, where hackers reportedly siphoned off more than 104 billion Solana-based tokens—worth about $30 million—into unauthorized wallets within a short time frame. The attack reportedly impacted over 900 customers, but under the current regulatory framework, Upbit is not mandated to provide any form of compensation to those affected.
Enhanced Security Measures and Penalties
To address these vulnerabilities, the FSC’s proposed rules include a stipulation for comprehensive IT security measures and enhanced operational standards for cryptocurrency platforms. Lawmakers are also deliberating on stricter penalties for exchanges, including fines of up to 3% of annual revenues for security breaches, a significant increase from the current maximum fine of about $3.7 million. This legislative initiative is part of a broader effort to regulate a sector that has seen numerous operational hiccups recently.
Operational Failures and Accountability
Recent figures compiled by the Financial Supervisory Service (FSS) reveal that South Korea’s top five cryptocurrency exchanges—Upbit, Bithumb, Coinone, Korbit, and Gopax—experienced a total of 20 operational failures between January and September 2023, with Upbit being involved in six incidents alone. These failures have reportedly cost victims over 3 billion won, or approximately $2.22 million. Additionally, allegations have emerged from some members of the ruling party claiming that Upbit delayed announcing the breach to coincide with a planned merger between Dunamu (the operator of Upbit) and Naver Financial, raising eyebrows over transparency and accountability.
