Author: Zen, PANews

South Korea’s crypto industry is entering a rare head-on regulatory conflict.

For the past few years, the Financial Intelligence Unit (FIU) has been the most important anti-money laundering regulator for cryptocurrency exchanges in South Korea. The FIU has repeatedly imposed heavy penalties on several leading exchanges for failing to report overseas VASPs, customer verification obligations (KYC/CDD), travel rules, and suspicious transaction reporting (STR), demonstrating a clear tightening of its regulatory stance.

However, recently, exchanges have no longer simply passively accepted penalties, but have begun to systematically challenge FIU's disciplinary basis and rule design through court lawsuits, industry association opinions, and other means.

After the FIU imposed a heavy penalty, the courts immediately put on the brakes.

The first battleground between exchanges and regulators is in the courts.

In early April of this year, the Seoul Administrative Court ruled in favor of Upbit's operating company, Dunamu, in the first instance, overturning the FIU's partial business suspension order against it. The FIU had previously accused Dunamu of engaging in withdrawals of less than 1 million won between August 2022 and August 2024, which were later confirmed to be related to undeclared VASPs, and imposed penalties including a three-month partial business suspension and a hefty fine.

The court did not deny the exchange's anti-money laundering obligations, but it held that the FIU's explanations of the standards for violations and the basis for business suspension were insufficiently clear. The court reasoned that for transactions under 1 million won, the regulatory standards and specific operational guidelines were not sufficiently clear at the time. Given that Dunamu had already taken certain blocking and monitoring measures, it was difficult to directly determine whether Dunamu acted intentionally or with gross negligence.

In other words, the court's review focuses not only on the exchange's AML obligations themselves, but also on the standards the FIU uses to support severe penalties. This is a crucial judicial signal for the FIU, indicating that for regulators to use severe penalties such as "business suspension," they must prove that the exchange clearly violated its obligations under the explicit rules, and cannot use retrospective results to infer that the exchange was grossly negligent.

However, the FIU disagrees with the above court ruling and has recently filed an appeal regarding the Dunamu case.

Besides Upbit, the Bithumb case has also taken a similar turn. In March of this year, the FIU imposed a six-month partial business suspension and a fine of 36.8 billion won on Bithumb, citing reasons including unreported VASP transactions with overseas entities and insufficient fulfillment of customer confirmation obligations. This is considered another of the most severe penalties imposed by the regulatory agency.

However, on April 30, the Seoul Administrative Court also accepted Bithumb's application for a stay of execution, deciding to suspend the effect of FIU's six-month partial business suspension order until 30 days after the judgment in this case. The court's reasoning was that if the order continued to be enforced, Bithumb may have already suffered some or all of the effects of the business suspension during the trial, and even if the order was subsequently revoked, the negative impacts such as limited new customer acquisition and reputational damage would be difficult to fully recover.

Following the legal battle, the FIU's enforcement logic against exchanges has faced continuous counterattacks from the exchanges in the judicial process. For the FIU, the past approach of promoting industry compliance through administrative penalties is now facing higher procedural and evidentiary requirements.

Industry self-regulatory organization DAXA protests "poison pill" clauses.

In addition to actively protecting the rights and interests of trading platforms through the judicial system, Korean exchanges have also launched a "second front" in terms of legislation and administrative rules.

South Korean financial authorities are pushing forward with revisions to the Specific Financial Information Act, aiming to further strengthen mechanisms for crypto asset transfers, customer verification, travel rules, and suspicious transaction reporting. One provision, which states that "crypto asset transfers exceeding 10 million won may be uniformly included in the STR (Suspicious Transaction Reporting) reporting scope," has sparked strong backlash from the crypto industry.

DAXA, the self-regulatory organization of South Korea's five major cryptocurrency exchanges, was the first to point out that this "poison pill clause" raises concerns that the STR standard may violate the principle of legal reservation. Under the current Special Financial Assets Act, the logic of STR is that financial institutions should report transactions when they have reasonable grounds to suspect that the transaction involves illicit funds or money laundering. However, the amendment is interpreted by the industry as requiring a report to the FIU whenever the amount of crypto asset transfers reaches 10 million won (approximately US$6,800). DAXA believes that this is equivalent to creating a new reporting obligation based on monetary standards at the lower-level legal level, exceeding the scope authorized by the higher-level law.

While stating its position in principle, DAXA also calculated the impact of the law on transactions. According to DAXA simulations, if the rule is implemented, the annual number of STR transactions on South Korea's five major won exchanges will surge from the current approximately 63,000 to approximately 5.445 million, an increase of about 85 times. This massive increase could effectively paralyze the normal AML monitoring system.

Behind these figures lies the essence of the STR (Suspicious Transactions) system. The value of STR originally lay in "suspiciousness screening": exchanges identify abnormal transactions by considering factors such as customer identity, source of funds, transaction path, on-chain address risk, and behavioral patterns, and then report these to the FIU. However, if a large number of normal, large-value transfers are included in the STR simply because the amount exceeds the threshold, the reporting system will be overwhelmed by a massive influx of low-quality signals, potentially reducing the FIU's ability to handle truly high-risk transactions.

This is also the core argument of the industry's so-called "over-regulation actually weakens the efficiency of AML." DAXA is not against strengthening AML itself, but believes that regulators should retain a risk-based approach, rather than simplifying "suspicious transaction reporting" to a single requirement of reporting transactions exceeding a certain amount.

South Korea's encryption regulations suffer from both "insufficient legislation" and "overly strict enforcement."

South Korea's cryptocurrency regulation has long faced a structural contradiction. On the one hand, South Korea is one of the world's most active cryptocurrency trading markets, with active retail trading, high exchange concentration, and a prominent influence of the Korean won in the market. On the other hand, its basic law on digital assets and its comprehensive regulatory framework for stablecoins, exchanges, and issuers are not yet fully mature, and many regulatory actions rely mainly on the Special Financial Act, the AML system, and FIU enforcement.

This model had practical rationale in its early stages. The crypto industry is high-risk, and issues such as fraud, cross-border money laundering, undeclared overseas platforms, and anonymous on-chain transfers genuinely require strong regulatory intervention. The FIU's inclusion of exchanges under its regulatory purview through AML obligations is an important step in establishing order in South Korea's crypto market.

In the past, when faced with FIU penalties, South Korean cryptocurrency exchanges primarily addressed their issues through administrative procedures, offering explanations, appeals, and rectifications. Now, the industry is taking the disputes to the courts and legislative review processes. This signifies a new phase in South Korean cryptocurrency regulation: regulatory bodies are no longer merely rule-makers and enforcers; their interpretations of rules, the basis for penalties, and the legitimacy of procedures will be jointly scrutinized by exchanges, industry associations, and the courts.

At a deeper level, the resistance and challenge from South Korea's leading exchanges to regulators represents a recalibration of the regulatory paradigm. Ultimately, this conflict aims to resolve how regulation can be made more sustainable.

In the short term, the tug-of-war between FIU and exchanges may continue to escalate. The Dunamu case has already been appealed, the Bithumb lawsuit is still ongoing, and there is still room for adjustment in the revision of the Special Kim Jong Un Act. In the long term, however, this conflict may actually help South Korea develop a more mature cryptocurrency regulatory framework.

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