Author: Zen, PANews

The South Korean cryptocurrency industry is entering a rare confrontation with proactive regulation.

In recent years, the Financial Intelligence Unit (FIU) has been the most important anti-money laundering regulatory authority for cryptocurrency exchanges in South Korea. The FIU has imposed heavy penalties on several leading exchanges concerning undeclared overseas VASPs, customer verification obligations (KYC/CDD), the Travel Rule, and suspicious transaction reports (STR), indicating a much stricter regulatory stance.

However, recently, exchanges are no longer passively accepting penalties; instead, they have begun to systematically challenge the basis for the FIU's sanctions and the design of its rules through court litigation and industry association statements.

After heavy penalties from the FIU, the court stepped on the brakes

The first frontline between exchanges and regulatory authorities took place in court.

In early April this year, the Seoul Administrative Court ruled in favor of Dunamu, the operator of Upbit, in the first instance, revoking part of the FIU's business suspension order against it. The FIU had previously accused Dunamu of involving in outflow transactions below 1 million won that were later confirmed to be related to undeclared VASPs from August 2022 to August 2024, and based on this, imposed a three-month partial business suspension and substantial fines.

The court did not deny that exchanges have anti-money laundering obligations but found that the FIU's explanations regarding the violations and criteria for business suspension were insufficiently clear. The court held that regarding transactions under 1 million won, the regulatory standards and specific operational guidelines at the time were not adequately defined. Furthermore, given that Dunamu had taken certain measures to obstruct and monitor these transactions, it was difficult to directly assert that they had acted with intent or gross negligence.

In other words, the court was concerned not only with the exchanges' AML obligations itself but also emphasized the standards by which the FIU supported heavy penalties. This serves as a crucial judicial signal for the FIU, indicating that if the regulatory agency wishes to impose a "business suspension" penalty, it must demonstrate that the exchanges had clearly violated their obligations under specific rules, rather than deriving a significant fault from the outcome after the fact.

However, the FIU expressed dissatisfaction with the court ruling and has recently appealed in the relevant case involving Dunamu.

In addition to Upbit, the Bithumb case has also exhibited a similar trajectory. 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 transactions with undeclared overseas VASPs and insufficient fulfillment of customer verification obligations, which was seen as another instance of maximum penalty imposed by the regulatory authority.

However, on April 30, the Seoul Administrative Court also accepted Bithumb's application for execution suspension, deciding to suspend the validity of the FIU's six-month partial business suspension order before the verdict of this case for 30 days. The court justified its decision by stating that if the order continues to be enforced, Bithumb might have already faced partial or total business suspension effects during the trial period, and even if the subsequent penalty were revoked, negative impacts such as limitations on acquiring new customers and damage to reputation would be difficult to fully recover.

After appearing before the court, the FIU's enforcement logic against exchanges encountered continuous counterattacks from the exchanges in the judiciary. For the FIU, the past approach of driving industry compliance through administrative penalties is now facing higher procedural and evidential requirements.

Industry self-regulatory organization DAXA protests "poison pill clause"

In addition to actively protecting platform rights at the judicial level, South Korean exchanges have directly opened a "second frontline" at the legislative and administrative rule levels.

The South Korean financial authorities are promoting amendments related to the "Specific Financial Information Act," intending to further strengthen mechanisms for cryptocurrency asset transfers, customer verification, the Travel Rule, and suspicious transaction reporting. Among these, a provision stating that "cryptocurrency transfers of over 10 million won may be automatically included in the STR reporting scope" has provoked strong backlash from the cryptocurrency industry.

The self-regulatory organization of South Korea's five largest cryptocurrency exchanges, DAXA, was the first to point out this "poison pill clause," indicating potential violations of the legal reservation principle in the STR standards. Under the current Specific Financial Act, the logic of STR is that financial institutions report when they have reasonable grounds to suspect that transactions involve illegal property, money laundering, and other circumstances. However, the amendment is understood by the industry as requiring reporting to the FIU as long as the amount of cryptocurrency transfers reaches over 10 million won (approximately $6,800). DAXA believes that this effectively creates a new reporting obligation based on the amount standard at the lower law level, exceeding the authorization scope of the higher law.

While expressing principled statements, DAXA also calculated the impact this law would have on exchanges. According to DAXA's simulation, if this rule is implemented, the annual number of STRs from the five largest won exchanges in South Korea would skyrocket from the current approximately 63,000 cases to about 5.445 million cases, increasing by around 85 times, and the enormous volume could effectively paralyze the normal AML monitoring system.

Behind these figures lies the essence of the STR system. The value of STR originally lies in "suspicion screening": exchanges identify abnormal transactions based on factors such as customer identity, source of funds, transaction paths, on-chain address risks, and behavioral patterns before reporting to the FIU. However, if a large number of normal high-value transfers are included in STR merely due to meeting the amount threshold, the reporting system will be overwhelmed by a flood of low-quality signals, potentially diminishing the FIU's capacity to handle genuinely high-risk transactions.

This also underscores the industry's core argument that "excessive regulation undermines AML efficiency." DAXA does not oppose strengthening AML itself; rather, it believes that regulation should retain a risk-based approach, rather than simplifying "suspicious transaction reporting" to a standard of reporting for amounts exceeding a specific threshold.

"Legislative insufficiency" and "overly dense enforcement" in South Korea's cryptocurrency regulation

South Korea's cryptocurrency regulation has long faced a structural contradiction. On one hand, South Korea is one of the most active cryptocurrency trading markets globally, with vibrant retail trading, high concentration of exchanges, and prominent influence in the won market; on the other hand, its comprehensive regulatory framework for digital assets, stablecoins, exchanges, issuers, etc., has yet to mature fully, and many regulatory actions primarily rely on the Specific Financial Act, AML system, and FIU enforcement.

This model had practical rationality in the early stages. The cryptocurrency industry is high-risk, with issues such as fraud, cross-border money laundering, undeclared overseas platforms, and anonymous on-chain transfers requiring strong regulatory intervention. The FIU's incorporation of exchanges into regulation through AML obligations has been an important step for South Korea in establishing order in the cryptocurrency market.

In the past, South Korean cryptocurrency exchanges, when facing penalties from the FIU, mostly provided explanations, defenses, and corrections within administrative procedures. Now, the industry is pushing disputes toward the courts and legislative opinion processes. This indicates that South Korea's cryptocurrency regulation is entering a new stage: regulatory agencies are no longer just the ones who formulate rules and enforce penalties, their rule interpretations, grounds for sanctions, and procedural legitimacy will also be jointly examined by exchanges, industry associations, and courts.

At a deeper level, the resistance and impact from leading exchanges in South Korea against the regulators represents a recalibration of the regulatory paradigm. Ultimately, what this conflict needs to resolve is how regulation can be more sustainable.

In the short term, the tug-of-war between the FIU and exchanges may continue to escalate. The Dunamu case has been appealed, the Bithumb lawsuit is not yet concluded, and there is still room for adjustment in the Specific Financial Act amendment. In the long term, however, this conflict may actually help South Korea establish a more mature regulatory framework for cryptocurrencies.

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