South Korea Implements Strict No-Fault Liability Rules for Cryptocurrency Exchanges Following Major Hacking Incident

South Korea Moves to Strengthen Crypto Exchange Regulations After $28 Million Hack

In a decisive response to a recent $28 million hacking incident at Upbit, South Korea’s largest cryptocurrency exchange, regulators are pushing for stringent no-fault liability rules for crypto exchanges. The Financial Services Commission (FSC) plans to incorporate these measures into upcoming legislation aimed at enhancing protections for virtual asset investors.

Bridging the Regulatory Gap

No-fault liability is a legal principle that mandates compensation to victims without the need to prove negligence or wrongdoing. This approach, familiar in motor vehicle accidents and hazardous industries, aims to provide swift and predictable payouts to affected users. Under the proposed regulations, cryptocurrency exchanges will be required to compensate users for losses incurred due to hacking or system failures, irrespective of the exchange’s fault—unless users acted with gross negligence.

Currently, crypto exchanges operate outside the jurisdiction of the Electronic Financial Transactions Act, creating a regulatory blind spot that leaves investors vulnerable. The Upbit incident has underscored this gap, prompting urgent calls for reform.

Governor Lee Chan-jin of the Financial Supervisory Service (FSS) emphasized the importance of system security, stating, “It is the lifeline of virtual asset markets.” The forthcoming Phase 2 legislation aims to significantly bolster these protections.

The Scope of the Problem

Recent data reveals alarming trends in the crypto sector. Between 2023 and September 2025, five major exchanges reported 20 IT incidents, affecting over 900 users and resulting in damages exceeding $29 million. Upbit alone accounted for six incidents impacting 616 users, while Bithumb and Coinone reported four and three incidents, respectively.

The Upbit breach, which occurred on November 27, 2023, saw a staggering 100 billion coins transferred out in less than an hour. In just 54 minutes, approximately 104 million Solana-based coins worth around 44.5 billion won were siphoned off, highlighting the rapid and devastating impact of cyberattacks on digital asset markets.

Addressing Regulatory Weaknesses

Despite the significant losses from the Upbit hack, regulators found no legal basis to penalize the exchange under existing laws, including the Virtual Asset User Protection Act. This has prompted financial authorities to explore options to close the regulatory gap and hold virtual asset service providers accountable for such breaches.

Tougher Standards and Penalties Ahead

The proposed legislation will require cryptocurrency businesses to adhere to the same security standards as traditional financial institutions. This includes maintaining adequate staffing, facilities, and robust IT infrastructure, as well as submitting annual technology plans for regulatory review.

Penalties for non-compliance are set to increase dramatically. Current fines are capped at approximately $3.5 million, but proposed amendments could allow fines to reach up to 3% of an exchange’s annual revenue.

Industry observers anticipate swift legislative action, with the ruling party expressing strong support for investor protection measures. As exchanges prepare for these regulatory changes, the landscape of South Korea’s cryptocurrency market is poised for a significant transformation, aiming to enhance security and restore investor confidence.