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South Korea is moving quickly toward imposing bank-level security obligations on crypto exchanges after a nearly $30 million breach at Upbit — the nation’s largest trading platform — exposed major vulnerabilities and triggered political backlash.
The Financial Services Commission (FSC), the country’s top financial watchdog, said exchanges could soon face no-fault liability, stricter IT infrastructure standards, expanded audits, and revenue-based fines for security lapses.
The November 27 hack, believed to be carried out by North Korea’s Lazarus Group, is part of a broader surge in AI-powered cyberattacks increasingly targeting South Korean financial institutions.
AI-Enhanced Impersonation Is the New Threat
Investigators believe the Upbit breach likely stemmed from compromised administrative credentials — a sign of internal security weaknesses, not blockchain-level faults.
Financial crime expert Robert Sanchez warned that attackers now use AI to impersonate employees and gather sensitive information.
“Lazarus is extremely adaptive. With AI, they can stalk administrators on LinkedIn, impersonate staff, and reverse-engineer access to private keys,” Sanchez said.
A Wake-Up Call for South Korea’s Crypto Laws
Financial Supervisory Service (FSS) Governor Chan-jin Lee said the incident highlights the urgent need for Phase 2 of the Virtual Asset User Protection Law — introduced in July 2024 but not yet fully implemented.
South Korea’s current crypto rules do not fully hold exchanges accountable for security failures.
Authorities also revealed that Upbit waited six hours before notifying regulators — a delay that drew criticism and raised concerns about transparency, especially amid Upbit’s high-profile merger with tech giant Naver.
“System security is the lifeline of virtual assets,” Lee said, adding that amendments will align crypto oversight more closely with the Capital Markets Act.
Upbit’s Troubled Security History
This isn’t Lazarus’ first attack on Upbit.
- 2019: Hackers stole $49 million from Upbit hot wallets
- 2024–2025: South Korea recorded 86 North Korea–linked hacks targeting its financial sector
President Jae Myung Lee has called for harsher penalties for companies that fail to protect user data.
Officials also criticized Upbit for managing cybersecurity spending inconsistently, lacking a dedicated annual budget.
Upbit has pledged to fully reimburse customers and says it has already frozen $1.77 million in funds linked to the breach.
But recovering crypto stolen by Lazarus remains extremely difficult, given their use of mixers and other obfuscation tools.
Exchanges Face Bank-Level Liability and Higher Costs
South Korea is now considering a no-fault liability system, meaning exchanges must reimburse users even when not directly at fault — a standard typically reserved for banks.
Exchanges could also face fines of up to 3% of annual revenue after a hack.
But the industry warns the new rules may cripple smaller platforms already struggling in a difficult market.
Louis Ko, CEO of Bitcoin startup Nonce Lab, said:
- Many altcoins lack real utility
- Most crypto projects in Korea struggle to create value
- Running a compliant crypto business requires ISM certification, costing 100 million KRW (~$75,000) annually
This makes entry into the market extremely difficult for startups.
Ko fears tighter rules may push entrepreneurs abroad — or worse, deeper into underground trading, where unregulated token sales have already caused major investor losses.
Stricter Oversight Coming in 2026
Korea plans further AML and security enhancements through coordination with the Financial Action Task Force (FATF), with legislative changes expected in the first half of 2026.
Ultimately, experts say strong security culture remains the best defense.
“Impersonation and spear-phishing are still some of the most common threats,” Sanchez noted. “Every organization needs proper training and strict internal procedures to keep up.”
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