South Korea’s Unprecedented Surge in Suspicious Crypto Activity: Stablecoins, Hwanchigi, and Global Regulatory Responses

Main Points :

• Between January and August 2025, South Korea saw 36,684 suspicious transaction reports (STRs) from virtual asset service providers, exceeding the combined totals of 2023 and 2024.
• The majority of flagged cases involve illegal foreign remittances (hwanchigi), where stablecoins—especially USDT (Tether)—are used to move and launder funds across borders.
• From 2021 through August 2025, the Korea Customs Service referred about US$7.1 billion in crypto-linked crimes to prosecutors. Over 90% of this sum is related to foreign exchange crimes (hwanchigi).
• Lawmakers in South Korea are pushing for tougher enforcement, new legal frameworks, better tracking of criminal funds, stricter AML (anti-money laundering) measures, and oversight of stablecoins.
• Global trends: many jurisdictions are implementing regulations on stablecoins, balancing innovation with risk. Examples include the EU’s MiCA framework, the U.S. GENIUS Act, and FATF recommendations tightening controls over virtual assets and stablecoins.

The Explosion of Suspicious Crypto Activity in South Korea

South Korea has witnessed a dramatic escalation in suspicious cryptocurrency transactions. In the first eight months of 2025 alone, VASPs filed 36,684 STRs with the Financial Intelligence Unit (FIU), already outstripping the sum of STRs over 2023 (16,076) and 2024 (19,658) combined. For context, in 2021 there were only 199 reports, which rose to nearly 18,000 in 2022.

This exponential growth reflects not just more detection, but also a sharp uptick in activity that regulators deem suspicious. The key operating method is hwanchigi—illegal foreign remittances—often facilitated via stablecoins. The model typically involves illicit proceeds converted offshore into stablecoins (or using stablecoins offshore), then transferred to domestic Korean exchanges, finally cashed out in Korean won, often bypassing formal foreign exchange controls.

Role of Stablecoins and Key Cases

Stablecoins—especially USDT (Tether)—feature prominently in many of the flagged cases. They are attractive tools for cross-border remittances because of their relatively fast, low-cost transfer capabilities and major liquidity. However, these same properties make them susceptible to misuse for laundering or smuggling money across borders.

A striking case: the authorities uncovered a scheme involving US$42 million transferred illegally between South Korea and Russia using USDT across more than 6,000 transactions between 2023 and 2024. Two Russian nationals were implicated.

Moreover, from 2021 through mid-2025, the Korea Customs Service has referred about US$7.1 billion worth of crypto-related crimes to prosecutors; over 90% of that amount is tied to hwanchigi/foreign exchange crimes.

Regulatory Response & Domestic Policy Pressure

Faced with this surge, South Korean lawmakers and regulatory bodies are pushing for stronger measures:

• Proposals to create systematic tools for tracing criminal funds, preventing disguised or fake remittances, and better interagency cooperation (FIU, KCS).
• Legislative efforts to define and regulate stablecoin issuance, possibly including domestic, won-backed stablecoins, to reduce reliance on foreign stablecoins and limit capital outflows.
• Increasing oversight, stricter AML/CFT requirements for virtual asset service providers, and possibly imposing limits or licensing obligations on stablecoin issuers.

However, there’s friction: the central bank (Bank of Korea) has expressed concerns about non-bank stablecoin issuance destabilizing foreign exchange controls and broader financial stability.

Global Context: How Other Jurisdictions are Responding

South Korea is not alone in grappling with stablecoins, AML risks, and cross-border crypto crime. Recent global trends include:

• EU (MiCA): The Markets in Crypto-Assets Regulation covers stablecoins (asset-referenced and e-money tokens), imposing requirements like transparency, reserve backing, licensing, and transaction limits.
• United States (GENIUS Act): Passed in mid-2025, this law sets clear requirements for stablecoin issuers (full backing by high-quality or liquid assets, redemption rights, disclosures). It also classifies stablecoin issuers under AML/CFT regimes.
• FATF / Global Standard Setting Bodies: Financial Action Task Force has flagged increasing use of stablecoins by illicit actors (terrorists, DPRK, drug traffickers) and pushed for even stronger implementation of AML/CFT standards in virtual assets/VASPs.
• Risk-based controls, blockchain analytics & emerging tech: Authorities and private firms are making more use of blockchain analytics, investigations of stablecoin reserve transparency, and research into anomaly detection in transaction networks.

Recent Developments Worth Monitoring

• Proposals to issue won-based stablecoins by private firms to reduce capital outflows and competition with dollar-stablecoins. Some are aiming for issuance by 2026.
• Central bank opposition to non-bank issuance of stablecoins, pointing to systemic risk, FX vulnerability, historical precedents (e.g. free banking era).
• Increasing public and legislative pressure in Korea to regulate cross-border crypto flows, including registration and reporting for virtual asset businesses and perhaps monthly reporting to authorities.

Implications for New Crypto Projects and Practitioners

For those looking into new crypto assets, revenue sources, or real-blockchain applications, here are important takeaways:

• Compliance & AML must be baked in from Day One: Projects involving stablecoins, cross-border transfers, or remittances will draw regulatory scrutiny. Having strong KYC, transaction monitoring, and clear reserve backing will be vital.
• Stablecoins remain high opportunity but high risk: Their utility for fast transfers, remittances, lending, DeFi, etc., is huge. But misuse risks are also high; legal frameworks are changing, so stability, auditability, transparency matter more than ever.
• Local regulation matters: What is legal or feasible in one country may be restricted elsewhere. For example, won-backed stablecoins may be encouraged in Korea but tightly regulated; elsewhere, foreign-issued stablecoins may be restricted or taxed. Knowing the domestic regulatory environment is essential.
• Tech and analytics demand is rising: Tools for detecting illicit flows, anomaly detection, real-time monitoring will be increasingly in demand. Being able to partner with or build such capabilities could differentiate new entrants.
• Risk of regulatory backlash or policy change: Sudden shifts (e.g. restrictions on stablecoin issuers, caps, licensing requirements) can materially affect business models. Flexibility and anticipating regulatory risk are necessary.

Summary

South Korea in 2025 is experiencing an unprecedented surge in suspicious cryptocurrency transaction reports, driven primarily by illegal foreign remittances (“hwanchigi”) and the misuse of stablecoins such as USDT. With over US$7.1 billion in crypto-linked crimes referred to prosecutors since 2021 (90% tied to foreign exchange crime), authorities are under pressure to strengthen AML/CFT frameworks, regulate stablecoin issuance more tightly, and reduce dependence on foreign-backed stablecoins. Globally, similar trends are visible: new laws and regulatory frameworks (such as MiCA in the EU and the U.S. GENIUS Act), heightened standards from organizations like FATF, and technical innovation in detection and compliance are all shaping the future of crypto regulation. For innovators and practitioners, the key message is clear: regulatory risk is now a core part of doing business in this space, not an afterthought.