Main Points
- South Korea’s Financial Supervisory Service (FSS) is investigating cryptocurrency exchanges for illegal activities.
- Two South Korean Won-based exchanges are under scrutiny, with more exchanges and wallet services to follow.
- The investigation is the first after the implementation of the “Crypto Asset User Protection Act.”
- Violators could face life imprisonment for illegal transactions generating more than 50 billion KRW ($3.7 million USD).
- The FSS aims to ensure compliance with regulations, monitor asset security, and check the ownership separation of users’ assets.
Overview of FSS’s New Investigations into Crypto Exchanges
South Korea’s Financial Supervisory Service (FSS) has announced its latest move to tighten oversight on cryptocurrency exchanges as part of its broader effort to curb illegal transactions. The FSS is currently preparing to investigate several crypto exchanges to ensure compliance with national regulations. According to a statement made on September 3rd, the FSS has flagged two cryptocurrency exchanges that operate using South Korean Won for exhibiting “abnormal patterns.”
In addition to these two exchanges, three more exchanges and one cryptocurrency wallet service have been identified for further investigation. The FSS intends to expand its efforts to review other exchanges should additional complaints or suspicions of illegal activity arise. This investigation represents the first enforcement of the “Crypto Asset User Protection Act,” a new law aimed at regulating virtual asset service providers (VASPs) in South Korea. The act was passed in July 2024 and enables the FSS to impose stringent penalties, including life imprisonment for individuals found guilty of amassing illegal profits exceeding 50 billion KRW ($3.7 million USD) through cryptocurrency transactions.
Focus on Major Exchanges and Wallet Providers
The FSS has emphasized that major exchanges such as Upbit, Bithumb, Coinone, Gopax, and Korbit will be under close scrutiny. Moreover, the regulatory body plans to extend its investigation to encompass smaller platforms, including crypto wallet providers and custodians. These platforms will be examined for their financial health, internal controls, and adherence to South Korean law. Special attention will be paid to how these companies store user assets, and whether they separate customer assets from their own corporate holdings.
The investigation also aims to scrutinize the relationships between cryptocurrency platforms and banks to ensure that service agreements are sound and transparent. The FSS will review the calculation and payment mechanisms of deposit usage fees to ensure compliance with regulatory guidelines.
Ensuring Transparency and Asset Security
As part of the investigation, the FSS has stated that it will particularly focus on identifying illegal or suspicious activities among VASPs. The aim is to confirm that all cryptocurrency transactions are adequately recorded and that the security of digital assets is maintained. “FSS will impose strict penalties on any illegal activities identified during the investigation, thereby maintaining order in the market,” the statement read.
FSS officials have also suggested that based on the results of their inspections, they will push for regulatory amendments if gaps in the system are identified. In particular, the investigation will probe businesses with poor financial standing and weak internal controls regarding cryptocurrency custody.
The FSS stressed that it would enforce compliance with regulations related to the custody and management of users’ digital assets. Companies must demonstrate that they have solid internal controls to safeguard users’ holdings. Additionally, the investigation will examine the terms of contracts between crypto exchanges and banks, ensuring transparency and fairness in deposit fee calculations and payments.
Investigating Customer Asset Ownership and Protection
Another significant aspect of the FSS investigation involves the ownership of cryptocurrency held by users on these platforms. One of the primary goals of the inspection is to confirm whether customer assets are held separately from the platform’s corporate assets. This is crucial for ensuring that, in the event of bankruptcy or other financial issues, users’ assets remain protected and are not absorbed into corporate debts.
Moreover, the FSS is paying close attention to how platforms are handling potential risks, particularly related to cybersecurity incidents. As such, companies will need to prove that they have sufficient insurance coverage or contingency funds in place to deal with potential hacking incidents or other financial emergencies.
The Path Forward for South Korean Cryptocurrency Regulation
The FSS’s announcement follows a growing trend in South Korea toward tighter regulation of the cryptocurrency industry. The “Crypto Asset User Protection Act,” which came into force in July, represents a significant step in ensuring the legality and security of cryptocurrency transactions within the country. It reflects an increasing global trend toward regulating digital assets as more countries recognize the need for comprehensive frameworks to prevent fraud, protect users, and ensure financial transparency.
The upcoming investigations could serve as a pivotal moment for the South Korean crypto market. As the FSS continues to inspect exchanges and wallet services, the industry may experience significant shifts as companies work to meet compliance standards. However, these investigations may also help establish a more secure and trustworthy environment for cryptocurrency users in the long run.
