South Korea's government is actively working to improve the accountability of cryptocurrency exchanges in the wake of the significant Upbit hack. This initiative is being spearheaded by key financial authorities, including the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), in collaboration with lawmakers. The recent hack has accelerated the progress of "Phase 2" virtual-asset legislation, which aims to introduce more stringent liabilities and penalties for these exchanges.
Upbit, recognized as South Korea's largest cryptocurrency exchange and operated by Dunamu Inc., suffered a substantial security breach in November 2025. The incident primarily impacted assets within the Solana ecosystem, resulting in the theft of approximately KRW 44.5 billion. This event has triggered a series of regulatory responses designed to strengthen the security and reliability of cryptocurrency exchanges operating within the country.
Amending Crypto Exchange Obligations and Penalties
The proposed legislative amendments are intended to harmonize the obligations and penalties imposed on crypto exchanges with those applicable to traditional financial institutions. This includes the establishment of a "no-fault compensation" framework, which would hold exchanges responsible for cyberattacks and system failures irrespective of negligence. Lawmakers are actively pursuing the integration of these requirements into the Electronic Financial Transactions Act (EFTA).
An official from the FSC commented on the potential impact, stating, "If the EFTA amendment raises penalty ceilings, virtual-asset businesses will be aligned to that standard." The legislation is considering the imposition of fines reaching up to 3% of annual revenue in cases of major hacks or system failures. Furthermore, exchanges would be mandated to submit annual IT-risk management plans to the FSC to demonstrate adherence to compliance standards.
Broader Regulatory and Security Measures
The FSS is actively advocating for the implementation of mandatory security audits, the enhancement of cold storage solutions, and the adoption of real-time transaction monitoring systems for exchanges. These proposed measures are aimed at addressing the security vulnerabilities that were brought to light by the recent hack and at reinforcing the overall security of exchange systems.
Governor Lee Chan-jin of the FSS underscored the necessity for more robust penalty enforcement, noting, "This is not something we can overlook, but current law restricts our ability to enforce penalties." The FSS is currently conducting on-site inspections at Upbit and is engaged in coordination with other agencies to conduct a thorough investigation into the security breach.
Implications for the Solana Ecosystem and Korean Crypto Markets
The Upbit hack predominantly affected assets associated with the Solana (SOL) ecosystem. The stolen assets were subsequently converted into Ethereum and other cryptocurrencies, with attackers employing cross-chain bridges and mixers to obscure the transaction trail. Evidence suggests a potential link to the North Korean Lazarus Group's involvement in the breach.
In response, Upbit took action to freeze approximately $8.18 million in funds related to the theft and strengthened its withdrawal protocols. However, this incident has amplified concerns regarding the security of centralized hot wallets, which have historically been frequent targets for hackers.
Systemic and Market Effects of Enhanced Liability
The anticipated regulatory changes are expected to influence liquidity provision and risk appetite across cryptocurrency exchanges operating in South Korea. The increased regulatory burden and operational costs, stemming from the proposed 3% revenue fines and the "no-fault" liability provisions, could lead to substantial transformations within the trading landscape.
Several structural adjustments are foreseen, including significant enhancements to exchange infrastructure and custody arrangements. The industry is likely to witness a heightened emphasis on multi-signature wallets, AI-powered threat detection systems, and the utilization of bank-grade custodians to effectively manage security risks.
Future Directions for Crypto Regulation in South Korea
The primary focus for South Korean authorities remains on reinforcing the security framework that governs cryptocurrency exchanges. The Upbit incident has served as a significant catalyst for regulatory evolution, pushing the industry towards adopting security obligations and consumer protection standards comparable to those in the traditional banking sector.
Lawmakers, under the leadership of Representative Kang Min-guk, have emphasized the critical need for transparency and accountability in the operational practices of exchanges. The ongoing discussions surrounding the "Phase 2" virtual asset law highlight the increasing public scrutiny concerning the equitable distribution of losses between firms and users.