South Korean financial authority issues suspension notice to Upbit for KYC/AML violation

South Korea’s Financial Intelligence Unit (FIU) has issued a suspension notice to Upbit. The government accused the nation’s largest crypto exchange of violating Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. 

According to reports, the exchange has until January 20 to respond. Final decisions on potential sanctions are expected on January 21.

This has not been a surprise to South Korean crypto traders or the exchange. On January 9, as reported by local news outlet Maeil Business, the FIU warned Upbit of a possible suspension going up to six months. 

While the suspension would prevent the platform from taking in new traders, existing users would still be allowed to trade. 

FIU investigations on Upbit could sanction fines

The regulator’s findings reportedly link Upbit to numerous KYC violations. This could lead to fines totaling 35.8 billion Korean won ($24,559,243). 

In addition to the KYC breaches, the FIU is looking into whether the crypto trading platform is involved in transactions with unregistered overseas crypto firms. According to the authorities, this fails to comply with South Korean financial regulations. 

The regulator’s findings reportedly point to approximately 700,000 cases where Upbit failed to properly implement KYC procedures. Under the Specific Financial Transaction Information Act, each violation can result in fines of up to 100 million Korean won (approximately $71,500).

Upbit has hinted at proactively identifying unregistered foreign exchanges. However, it insists that there was no deliberate intention to violate the law.

In addition, the exchange’s license renewal has been on hold since October 2024. South Korean authorities stated that they need additional time to investigate a number of suspected KYC violations before making a final decision on the license. 

Should the suspension go through, it will further complicate the renewal process, leaving the exchange’s operations in an uncertain position.

Financial ties to virtual banks raise concerns

Last year, the Financial Services Commission (FSC) announced a probe into Upbit’s market dominance. The exchange’s dominance accounts for about 70% of the nation’s digital asset trading volume. 

FSC Chairman Kim Byung-hwan confirmed the investigation. He urged authorities to ensure exchanges are upholding fair competition standards.

The investigations extended to Upbit’s relationship with K Bank, South Korea’s first internet-only bank. Lawmaker Lee Kang-il, who brought the matter to regulators’ attention, revealed that Upbit deposits account for 4 trillion won ($2,741,669,608) of K Bank’s 22 trillion won ($15,079,182,844) in total.

This represents nearly 20% of the bank’s holdings. Lee warned that disruptions to Upbit’s operations could potentially trigger a bank run on K Bank.

Kim Byoung-hwan addressed these concerns. He noted that the Virtual Assets Committee, tasked with overseeing the crypto market, would carry out a thorough review of Upbit’s market dominance. They would also look into K Bank’s involvement in supporting the platform.

Lee also criticized K Bank for offering an unsustainable 2.1% interest rate on deposits from Upbit customers. He argued that the close financial ties between the two institutions contradict South Korea’s principle of separating finance and industry.

FSC to add more laws to the crypto regulatory framework

In other news, the FSC, which is the top financial regulator in South Korea, has started discussions to draft a follow-up to its crypto regulatory framework. According to local reports, the authorities plan for the new legislation to be introduced in the latter half of 2025.

FSC members met recently to outline priorities for the upcoming bill. Vice Chairman Kim So-young talked about the global trend toward stricter crypto regulations. He echoed the importance of investor protection and addressing remaining regulatory uncertainties.

The country’s initial regulatory framework was enacted in July of last year, following its passage in 2022. It was primarily aimed at protecting investors. Among its key provisions was a requirement for exchanges to store at least 80% of user crypto deposits in separate cold wallets to “control” the risks of asset mismanagement.

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