South Korea Moves to Impose Bank-Level ‘No-Fault’ Liability on Crypto Exchanges

South Korea plans to make major crypto exchanges compensate customers for hacks and outages in the same way banks must do.

According to a report from the Korea Times, the Financial Services Commission (FSC) is drafting rules that would force exchanges to reimburse users for losses from hacking or system failures even when the platform is not directly at fault. 

This “no-fault” rule, the report reads, now applies only to banks and electronic payment firms, leaving a gap for digital asset platforms.

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Regulators Eyeing Korean Exchanges

The recent fallout and breaches from high-profile crypto exchanges, based in SK and worldwide, have drawn scrutiny and concern from regulators. 

Data from the Financial Supervisory Service (FSS) show the five largest exchanges, Upbit, Bithumb, Coinone, Korbit and Gopax, reported 20 system failures from 2023 through September this year. More than 900 customers lost about 5 billion won in total, and Upbit accounted for six incidents, over 600 affected users and 3 billion won in losses (AU$3.05M).

The immediate catalyst was a 27 Nov. exploit at Upbit, where Solana-based tokens worth 44.5 billion won, or about US$30.1 million (AU$46.05 million), were moved to external wallets in under an hour, as Crypto News Australia reported.  

Under current law, authorities cannot order user compensation, and the exchange has faced limited penalties.

Higher Standards

Lawmakers are now considering higher standards for IT security, systems and staffing, plus tougher sanctions. One proposal would allow fines of up to 3% of an exchange’s annual revenue for hacking cases, replacing the current 5 billion won ceiling.

The Upbit case has also raised concerns over delayed reporting. The hack was detected around 5 a.m. but not reported to the FSS until 10:58 a.m., after a planned merger between Upbit operator Dunamu and Naver Financial closed. 

FSS Governor Lee Chan-jin said the hack “is not something we can overlook”, but admitted that current oversight rules limit the agency’s ability to impose tough penalties

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