South Korea Overhauls Crypto Rules to Combat Crime, Secure Digital Economy Lead

South Korea's regulatory and enforcement agencies are intensifying efforts to combat cryptocurrency-related crimes, with recent developments underscoring the country's commitment to strengthening anti-money laundering (AML) frameworks and addressing vulnerabilities in the digital asset sector. The Financial Intelligence Unit (FIU) has announced plans to implement stricter AML measures, including pre-emptive account freezes for serious offenses, as part of a broader overhaul aimed at preventing illicit activities. These measures, expected to be finalized by mid-2026, will require legislative amendments and expand collaboration with international bodies like the Financial Action Task Force. The initiative marks the most comprehensive AML regulatory update since the 2021 revision of the Special Financial Information Act.

The urgency for such reforms has been amplified by high-profile incidents, including a $30 million hack at Upbit, South Korea's largest crypto exchange, attributed to North Korea's Lazarus hacking group. The breach occurred amid a press event for Naver Corp.'s $10.3 billion acquisition of Upbit's parent company, Dunamu Inc., raising suspicions that the timing was deliberate. Authorities are investigating the incident, with similarities noted to a 2019 attack also linked to Lazarus. In response, Upbit suspended deposits and withdrawals and pledged to cover the losses using its own assets to protect user funds. The attack highlights the persistent threat of state-sponsored cybercrime and the need for robust exchange security protocols.

Meanwhile, the fallout from the 2022 Terra ecosystem collapse continues to shape South Korea's crypto regulatory landscape. Do Kwon, co-founder of Terraform Labs, faces a U.S. sentencing hearing for his role in the $40 billion market crash, with his legal team advocating for a maximum five-year prison term. Kwon's case, which includes a $19 million forfeiture agreement, is part of a broader reckoning for crypto figures, as seen in the 25-year sentence for former FTX CEO Sam Bankman-Fried. South Korean prosecutors are separately pursuing up to 40 years for Kwon, reflecting the country's stringent approach to accountability.

The Financial Services Commission (FSC) and Bank of Korea (BOK) have also taken a hardline stance on stablecoins, advocating for stricter liquidity and oversight rules to mitigate risks to financial stability. The BOK has emphasized the need for banks to lead stablecoin issuance, arguing that non-banking entities could undermine existing regulations. This approach aligns with global efforts to contain risks associated with digital assets, as seen in Switzerland's delayed implementation of crypto tax-sharing frameworks.

As South Korea navigates these challenges, the government is also addressing cross-border trade dynamics. A special bill to reduce U.S. tariffs on Korean automobiles to 15% has been submitted, contingent on the fulfillment of a $350 billion investment pledge into U.S. industries. The move underscores the strategic importance of the U.S. market, which accounts for nearly half of South Korea's $70.8 billion vehicle exports in 2024.

In sum, South Korea's multi-pronged strategy-combining regulatory overhauls, enhanced enforcement, and international collaboration-reflects a determination to secure its position as a leader in the digital economy while mitigating the risks posed by crypto-related crimes and systemic vulnerabilities.