South Korea to Impose No-Fault Liability on Crypto Exchanges to Plug Security Gaps

South Korea is moving swiftly to address the growing concerns in its crypto market following a major breach at Upbit, the country's largest cryptocurrency exchange. A recent hack, which resulted in the unauthorized transfer of assets worth approximately $30.1 million, has accelerated regulatory efforts to impose stricter oversight on digital asset platforms. The Financial Services Commission (FSC) is now reviewing provisions that would require exchanges to compensate users for losses, even in cases where the platform is not at fault.

The proposed rules aim to align crypto exchanges with traditional financial institutions by enforcing no-fault liability standards. This would mirror the requirements already in place for banks and electronic payment firms under the Electronic Financial Transactions Act. The shift in policy highlights South Korea's intent to strengthen consumer protection and build trust in the digital asset space.

Data from the Financial Supervisory Service (FSS) underscores the urgency for these changes. Between 2023 and September 2025, five major exchanges—including Upbit—reported 20 system failures, affecting over 900 users and causing cumulative losses of 5 billion won. Upbit alone accounted for six of these incidents, affecting more than 600 users with 3 billion won in damages. The repeated issues have prompted lawmakers to consider more robust regulatory measures.

The regulatory changes are driven by both the Upbit breach and the broader instability observed across the crypto sector. The November 27 hack at Upbit involved the unauthorized withdrawal of over 104 billion Solana-based tokens, valued at 44.5 billion won. Despite the severity of the breach, current laws do not allow regulators to enforce compensation from the exchange, highlighting a critical gap in oversight.

The proposed reforms include mandatory IT security infrastructure, stricter personnel and operational standards, and increased penalties for non-compliance. Lawmakers are also considering a revision that would allow fines of up to 3% of annual revenue for hacking incidents, a measure currently applied to traditional financial institutions. This would significantly raise the stakes for exchanges, compelling them to prioritize cybersecurity and user safety.

The FSC has emphasized the need to close these regulatory gaps to ensure that digital assets are governed with the same rigor as conventional financial products. Governor Lee Chan-jin acknowledged the limitations of current oversight, stating that "regulatory oversight clearly has limits in imposing penalties" under existing law. By introducing no-fault liability, the government aims to establish a more secure environment for crypto users and prevent future incidents.

The new regulations are expected to reshape the cost structure for crypto exchanges in South Korea. Firms that previously treated hacks as exceptional events will now face the same liabilities as banks. This change will increase operational costs, potentially leading to higher insurance requirements and the need for larger reserves to cover potential losses. Compliance teams will also face more detailed audits, and governing boards may be held more accountable for system reliability. For investors, the shift offers a significant benefit: a safety net that currently does not exist. Many Korean traders hold assets directly on centralized exchanges, where platform failures often lead to lengthy disputes over reimbursement. Under the new rules, users would be automatically compensated for losses caused by hacks or system failures, regardless of the exchange's negligence.

The regulatory overhaul also has broader implications for the market. Some analysts believe that the increased financial and operational burdens could lead to consolidation or even the exit of smaller exchanges unable to meet the new standards. This could reduce fragmentation in the sector and push the remaining players toward greater innovation and security. However, it also raises concerns about reduced competition and potential market monopolization.

Looking Ahead

South Korea's regulatory changes come at a pivotal time for the digital asset market. The country is positioning itself to align with global standards by integrating crypto with established financial frameworks. These efforts are part of a broader strategy to close gaps exposed by recent security incidents, including the Upbit hack and other system failures.

Legislative amendments are expected in the first half of 2026, with the government aiming to finalize the draft bill before the National Assembly's extraordinary session. These reforms will also be complemented by the introduction of a stablecoin bill, which is set to establish rules for issuance, reserves, and redemptions. Together, these measures reflect a determination to create a secure and trustworthy environment for digital finance.

As the regulations take shape, exchanges and investors alike will need to stay informed. For crypto platforms, the focus will shift toward compliance and risk management. For investors, understanding these changes will be crucial for making informed decisions in a rapidly evolving market.