South Korea's Regulatory Overhaul for Crypto Exchanges
Recent months have seen most cryptocurrency exchanges in South Korea facing shutdowns following new regulations from the Financial Services Commission (FSC). These measures stem from amendments to the Act on Reporting and Using Specified Financial Transaction Information:
- Exchange staff trading on their own platforms now risk penalties up to ₩100 million (≈$90,000), along with potential trading license suspensions
- Violations may result in corrective orders, business suspensions, or complete license revocation
- All virtual asset businesses must report operations to Korea's Financial Intelligence Unit (KoFIU)
- The amendments took effect March 25, 2021, with a six-month grace period
On August 1, 2021, the FSC escalated enforcement by targeting 11 exchanges using fraudulent collective accounts, planning to halt their operations while reporting illegal activities to prosecutors and police.
👉 How are crypto regulations evolving worldwide?
The Six-Month Regulatory Storm
South Korea's crypto exchange crackdown began in March 2021 and continues evolving:
| Date | Regulatory Action |
|---|---|
| March 25 | FSC amendments take effect |
| April 18 | Government announces anti-money laundering/fraud measures |
| April 21 | Customs begins monitoring crypto-based illegal transactions |
| April 22 | Financial watchdog institutes employee trading ban |
| June 7 | Legislative discussions begin on penalizing market manipulation |
| June 16 | Over 20 exchanges ordered to submit delisting reports |
| August 1 | 11 mid-sized exchanges face shutdown |
The Exchange Shutdown Wave
Since May 2021, South Korean exchanges must partner with banks to issue real-name accounts—a requirement only four major exchanges (Bithumb, Coinone, Upbit, Korbit) currently meet. Approximately 100 smaller exchanges face operational crises:
- Darlbit: Ceased operations July 15 after halting deposits/withdrawals
- CPDAX: Announced September 1 shutdown on July 30
- Bitsonic: Temporarily suspended services via Telegram announcement
Three Regulatory Objectives
- Combating Crypto-Related Crime
With trading volumes surging, South Korea aims to eliminate anonymous transactions through real-name verification, making money laundering and fraud more detectable. - Enforcing Bank Partnerships
The amended Act requires exchanges to implement information security systems through bank collaborations—pushing exchanges toward compliance. - Addressing Tax Evasion
The National Tax Service identified 2,416 individuals using crypto for tax avoidance, prompting stricter oversight of taxable crypto income.
Digital Asset Custody: A Emerging Solution?
With traditional exchange models under pressure, South Korean banks are exploring digital asset custody services through joint ventures:
- KB Financial Group: Partnered with Haechi Labs/Hashed to launch Korea Digital Asset (KODA) in November 2020
- Shinhan Bank: Became strategic investor in Korea Digital Asset Custody (KDAC)
- NH Bank: Teaming with ICT firms to develop digital asset services
- Woori Bank: Forming custody JV with Bitcoin fintech firm Coinplug
👉 What is digital asset custody and why does it matter?
Why Custody Services May Succeed
- Risk Mitigation
Unlike volatile trading, custody offers banks stable revenue while complying with regulations. - Indirect KYC Solution
Custody services inherently verify user identities, satisfying real-name requirements. - Regulatory Alignment
Provides a compliant bridge between traditional finance and crypto ecosystems.
However, challenges remain as only major exchanges currently maintain bank relationships, leaving smaller players vulnerable.
FAQs
Q: Which South Korean exchanges remain operational?
A: As of 2021, only Bithumb, Coinone, Upbit and Korbit maintain full banking partnerships.
Q: How does real-name verification work?
A: Users must link exchange accounts to bank accounts registered with their national ID, eliminating anonymity.
Q: Can foreign investors access South Korean exchanges?
A: Foreigners may trade but must complete additional verification procedures per anti-money laundering rules.
Q: What cryptocurrencies do custody services support?
A: Initial offerings typically include Bitcoin (BTC), Ethereum (ETH), and native tokens like KLAY.
Q: Are crypto-to-fiat conversions still allowed?
A: Yes, but only through registered exchanges with banking partners following strict transaction reporting.
Q: When do the new regulations fully take effect?
A: The six-month grace period ends September 25, 2021, after which non-compliant exchanges must cease operations.
This regulatory shift marks South Korea's attempt to balance innovation with financial stability—with digital asset custody potentially offering a sustainable path forward for institutional crypto adoption.