Author: Zen, PANews
The Korean crypto industry is entering a rare direct regulatory confrontation.
Over the past few years, Korea’s Financial Intelligence Unit (FIU) has been the most important anti-money laundering regulator for Korean cryptocurrency exchanges. The FIU has imposed heavy fines on multiple leading exchanges over issues including unreported overseas VASPs, customer identification obligations (KYC/CDD), the Travel Rule, and suspicious transaction reports (STRs), signaling a clearly stricter regulatory stance.
However, recently, exchanges have no longer passively accepted penalties; instead, they have begun systematically challenging the FIU’s grounds for sanctions and regulatory design through court litigation, industry association submissions, and other means.
After the FIU imposed heavy penalties, the court hit the brakes.
The first front between the exchange and regulators occurs in court.
In early April this year, the Seoul Administrative Court ruled in favor of Dunamu, the operator of Upbit, in its first-instance trial, overturning part of the suspension order issued by the FIU. The FIU had previously accused Dunamu of facilitating withdrawal transactions under 1 million KRW during the period from August 2022 to August 2024 that were later confirmed to be linked to unregistered VASPs, and imposed penalties including a three-month partial business suspension and substantial fines.
The court did not deny the exchange's anti-money laundering obligations, but it found that the FIU's explanations regarding the standards for violations and grounds for suspension of operations were insufficiently clear. The court held that, at the time, regulatory standards and specific operational guidelines for transactions under 1 million KRW were not adequately defined. Given that Dunamu had already implemented certain blocking and monitoring measures, it was difficult to directly conclude that it acted with intent or gross negligence.
In other words, the court’s review focuses not only on the exchange’s AML obligations themselves, but more importantly on the standards by which the FIU justifies severe penalties. This sends a crucial judicial signal to the FIU: regulatory authorities must demonstrate that the exchange clearly violated its obligations under well-defined rules before imposing severe sanctions such as suspension of operations; they cannot retroactively infer gross negligence based solely on adverse outcomes.
However, the FIU has expressed disagreement with the above court ruling and has recently filed an appeal regarding the Dunamu-related case.
In addition to Upbit, the Bithumb case has followed a similar trajectory. In March this year, the FIU imposed a six-month partial suspension of operations and a fine of 36.8 billion Korean won on Bithumb, citing reasons such as transactions with unregistered overseas VASPs and inadequate fulfillment of customer verification obligations, marking another highest-intensity enforcement action by regulators.
However, on April 30, the Seoul Administrative Court also granted Bithumb’s application to suspend enforcement, deciding to temporarily halt the effect of the FIU’s six-month partial business suspension order until 30 days after the court’s ruling. The court reasoned that if the suspension remained in effect, Bithumb might already suffer partial or full business disruption during the litigation period, and even if the penalty were later overturned, negative impacts such as restricted customer acquisition and reputational damage would be difficult to fully reverse.
After going to court, the FIU’s enforcement rationale against the exchange has faced continuous pushback from the exchange in judicial proceedings. For the FIU, the previous approach of driving industry compliance through administrative penalties is now subject to higher procedural and evidentiary standards.
Industry self-regulatory organization DAXA protests the "poison pill" clause.
In addition to actively safeguarding the rights of trading platforms at the judicial level, Korean exchanges have also directly opened a "second front" through legislative and administrative regulations.
South Korea’s financial regulators are advancing revisions to the Specific Financial Information Act, aiming to further strengthen mechanisms for crypto asset transfers, customer verification, the Travel Rule, and suspicious transaction reporting. One provision—requiring all crypto asset transfers exceeding 10 million KRW to be automatically included in Suspicious Transaction Reports (STRs)—has sparked strong backlash from the crypto industry.
The DAXA, South Korea’s self-regulatory organization for the five major cryptocurrency exchanges, was the first to highlight that the STR standard may violate the principle of legal reservation. Under the current Special Financial Information Act, the logic of STR is that financial institutions must report transactions when there is reasonable suspicion they involve illicit assets, money laundering, or similar activities. However, the amendment has been interpreted by the industry as requiring reports to the FIU whenever cryptocurrency transfers exceed 10 million Korean won (approximately $6,800). DAXA argues that this effectively establishes a new reporting obligation based solely on monetary thresholds at the subordinate regulatory level, exceeding the authority granted by the higher-level law.
While making a principled statement, DAXA also estimated the impact of this law on exchanges. According to DAXA’s simulation, if this rule is enforced, the annual number of STRs filed by South Korea’s five major KRW exchanges would surge from approximately 63,000 to about 5.445 million—an increase of roughly 85 times—potentially overwhelming the existing AML monitoring system and rendering it effectively inoperable.
Behind these numbers lies the essence of the STR system. The value of STRs originally lies in “suspiciousness screening”: exchanges identify unusual transactions by analyzing factors such as customer identity, fund sources, transaction pathways, on-chain address risk, and behavioral patterns, then report them to the FIU. However, if a large volume of normal large transfers are included in STRs solely because they exceed a monetary threshold, the reporting system risks being overwhelmed by a flood of low-quality signals, potentially diminishing the FIU’s ability to process truly high-risk transactions.
This is also the core argument behind what the industry calls “over-regulation undermining AML effectiveness.” DAXA does not oppose strengthening AML measures per se, but rather believes regulation should preserve a risk-based approach rather than applying a one-size-fits-all rule that mandates reporting simply because a transaction exceeds a certain amount.
South Korea’s cryptocurrency regulation: "insufficient legislation" and "excessive enforcement"
South Korea has long faced a structural contradiction in its cryptocurrency regulation. On one hand, it is one of the most active crypto trading markets globally, characterized by high retail trading activity, concentrated exchange markets, and significant influence of the Korean won. On the other hand, its foundational legal framework for digital assets, along with comprehensive regulations covering stablecoins, exchanges, and issuers, has not yet fully matured; many regulatory actions are primarily driven by the Special Financial Transactions Act, AML systems, and FIU enforcement.
This model was practically reasonable in the early stages. The cryptocurrency industry carries high risks, and issues such as fraud, cross-border money laundering, unreported offshore platforms, and anonymous on-chain transfers indeed required strong regulatory intervention. By incorporating exchanges under AML obligations, the FIU took a crucial step toward establishing order in Korea’s cryptocurrency market.
In the past, Korean cryptocurrency exchanges facing penalties from the FIU primarily responded through administrative procedures, such as explanations, appeals, and corrective actions. Now, the industry is taking disputes to court and into legislative review processes. This signifies that Korea’s cryptocurrency regulation is entering a new phase: regulatory authorities are no longer solely the rule-makers and enforcers; their interpretations of rules, grounds for sanctions, and procedural legitimacy are now being jointly scrutinized by exchanges, industry associations, and the courts.
On a deeper level, the resistance and challenges posed by South Korea’s leading exchanges to regulators represent a recalibration of the regulatory paradigm. The ultimate goal of this conflict is to determine how regulation can be more sustainable.
In the short term, the tug-of-war between the FIU and exchanges may continue to escalate. An appeal has been filed in the Dunamu case, the litigation against Bithumb is still ongoing, and revisions to the Special Financial Information Act still offer room for adjustment. In the long term, this conflict may ultimately help Korea develop a more mature cryptocurrency regulatory framework.