South Korea's Crypto Industry Engages in High-Stakes Regulatory Battle

The cryptocurrency industry in South Korea is experiencing a significant shift in its relationship with regulators. For years, the Financial Intelligence Unit (FIU) has been the primary anti-money laundering regulator for cryptocurrency exchanges in the country.

However, recent developments indicate that exchanges are no longer willing to simply accept penalties imposed by the FIU. Instead, they have begun to challenge the agency's disciplinary basis and rule design through court lawsuits and industry association opinions.

The first major battleground between exchanges and regulators is in the courts. In April 2024, the Seoul Administrative Court ruled in favor of Upbit's operating company, Dunamu, overturning a partial business suspension order imposed by the FIU. The court held that the FIU's explanations for violating standards and suspending businesses were insufficiently clear.

The ruling sent a crucial signal to the FIU, indicating that regulators must prove exchanges clearly violated their obligations under explicit rules before imposing severe penalties like business suspension. However, the FIU has since appealed the decision.

Similar developments have occurred in the case of Bithumb, another major exchange. The FIU imposed a six-month partial business suspension and a fine of 36.8 billion won on Bithumb, citing unreported VASP transactions with overseas entities and insufficient customer verification obligations. However, the Seoul Administrative Court also accepted Bithumb's application for a stay of execution, deciding to suspend the effect of the FIU's order.

The conflict between exchanges and regulators has also spilled over into legislative proceedings. The Financial authorities are pushing forward with revisions to the Specific Financial Information Act, aiming to strengthen mechanisms for crypto asset transfers, customer verification, travel rules, and suspicious transaction reporting. However, industry self-regulatory organization DAXA protests that a proposed 'poison pill' clause may violate the principle of legal reservation.

DAXA believes that this clause could create a new reporting obligation based on monetary standards at the lower-level legal level, exceeding the scope authorized by higher-level law. According to simulations, if implemented, the annual number of STR transactions on South Korea's five major won exchanges would surge from approximately 63,000 to around 5.445 million, an increase of about 85 times.

This massive influx could effectively paralyze the normal AML monitoring system. DAXA argues that regulators should retain a risk-based approach, rather than simplifying suspicious transaction reporting to a single requirement of reporting transactions exceeding a certain amount.