In response to a major security breach at Upbit, the South Korean government is reportedly moving to impose bank-level liability on cryptocurrency exchanges — a significant shift that could reshape the regulatory landscape for digital assets in the country. The proposed changes aim to protect investors by holding exchanges to the same “no-fault compensation” standards that apply to traditional banks and electronic payment firms.
What Triggered the Regulatory Push: The Upbit Hack
On November 27, 2025, Upbit suffered a severe security breach in which more than 104 billion Solana-based tokens — approximately 44.5 billion won (about USD $30.1 million) — were transferred to external wallets within roughly an hour.
Although Upbit later said it would reimburse affected user assets — reportedly covering 38.6 billion won from its reserves and freezing another 2.3 billion won via blockchain tracking — the incident exposed glaring deficiencies in South Korea's current regulatory framework.
Under existing law, regulators lack the authority to force crypto exchanges to compensate users for losses caused by hacks or system failures. That gap has now galvanized policymakers to reconsider how digital-asset platforms are regulated.
What “Bank-Level, No-Fault Compensation” Means
The draft revisions under review by the Financial Services Commission (FSC) would apply a “no-fault” liability model to major crypto exchanges. That means exchanges would be required to compensate users even if the exchange itself was not negligent or at fault for the loss.
This model currently applies to traditional banks and electronic payment service providers under the country's Electronic Financial Transactions Act. Extending the same standard to crypto platforms would significantly raise the bar for consumer protection in Korea's growing digital-asset sector.
Beyond Compensation: Stricter Oversight and Penalties
The proposed legislation goes beyond compensation requirements. It also aims to impose tighter operational standards on exchanges, including:
Mandatory IT security infrastructure plans,
Robust system and personnel requirements,
Stronger penalties for security failures or system outages.
Specifically, lawmakers are considering fines of up to 3 percent of an exchange's annual revenue for hacking incidents — matching the penalties faced by traditional financial institutions. Currently, crypto-exchange fines are capped at 5 billion won.
A Response to Recurring Failures — Not Just One Hack
While the November 27 Upbit breach was the immediate catalyst, regulators say the move also reflects a pattern of recurring outages and system failures across Korea's crypto industry. According to data submitted to lawmakers by the Financial Supervisory Service (FSS), the country's five largest exchanges — Upbit, Bithumb, Coinone, Korbit and Gopax — reported 20 system-failure incidents between 2023 and September 2025, more affecting than 900 users and causing combined losses of roughly 5 billion won. Upbit alone accounted for six incidents, affecting over 600 users.
These recurring technical issues have underscored — in the view of regulators — that crypto exchanges should not be treated lightly, but rather held to standards comparable to banks and payment systems.
Political and Regulatory Timing
The push for tougher regulation comes at a sensitive moment. The breach at Upbit coincided with a takeover move: just hours earlier, Upbit's parent company, Dunamu, completed a merger with Naver Financial. Some lawmakers raised questions about why the hack was only reported several hours later — after the merger was finalized — suspecting possible delay or obfuscation.
FSS leadership has acknowledged both the severity of the incident and the limitations of current oversight. As one official put it, “the hacking is not something we can overlook. However, regulatory oversight clearly has limits in imposing penalties.”
At a time when lawmakers are also pushing for a bill governing stablecoins and broader crypto regulation, the liability-reform proposal could become a central piece of the next wave of digital-asset legislation — possibly by early 2026.
Conclusion
The decision by South Korean authorities to potentially impose bank-level, no-fault liability on crypto exchanges marks a pivotal turning point for the country's digital-asset industry. Spurred by the high-profile hack of Upbit and a series of systemic failures across multiple platforms, the proposed reforms would elevate consumer protection and operational standards — bringing crypto operators closer in line with traditional financial institutions.
If enacted, the legislation may significantly reshape how crypto platforms operate in South Korea, likely making them more cautious, more transparent, and more accountable. For investors and users, it could mean greater peace of mind. For exchanges, it will probably require serious upgrades in infrastructure, risk management, and compliance. As South Korea prepares to debate these changes in the coming months, the world will be watching to see whether this model becomes a benchmark for crypto regulation globally.
