Author: Zen, PANews
The South Korean cryptocurrency industry is entering a rare period of direct confrontation with regulators.
In recent years, the Korea Financial Intelligence Unit (FIU) has been the primary anti-money laundering (AML) regulator for cryptocurrency exchanges in South Korea. Focusing on undeclared overseas VASPs, customer identification obligations (KYC/CDD), the Travel Rule, and Suspicious Transaction Reports (STRs), the FIU has levied heavy fines on several leading exchanges in succession, signaling a clear tightening of regulatory posture.
Recently, however, exchanges are no longer just passively accepting penalties. They have begun systematically challenging the FIU's disciplinary grounds and rule design through court lawsuits and industry association opinion statements.
After FIU's Heavy Penalties, Courts Repeatedly Apply the Brakes
The first battlefront between exchanges and regulators has emerged in the courts.
In early April, the Seoul Administrative Court ruled in favor of Upbit's operator Dunamu in the first instance, partially overturning the FIU's business suspension order. The FIU had accused Dunamu of processing withdrawal transactions under 1 million KRW between August 2022 and August 2024 that were later linked to undeclared VASPs, imposing a 3-month partial business suspension and a substantial fine.
The court did not deny the exchange's AML obligations. However, it found the FIU's explanation of the violation criteria and the basis for the business suspension insufficiently clear. The court ruled that for transactions under 1 million KRW, the regulatory standards and specific operational guidelines were not fully clarified at the time. Given that Dunamu had implemented certain blocking and monitoring measures, it was difficult to directly conclude there was intentional or gross negligence.
In other words, the court's review focused not only on the AML obligations themselves but also emphasized the standards the FIU must use to justify severe penalties. This is a crucial judicial signal to the FIU, indicating that to use heavy penalties like "business suspension," the regulator must prove the exchange clearly violated its obligations under explicit rules, and cannot infer gross negligence based on ex-post facto outcomes.
However, the FIU has expressed dissatisfaction with the court's ruling and recently appealed the Dunamu case.
A similar trend is evident in the Bithumb case. In March, the FIU imposed a 6-month partial business suspension and a 36.8 billion KRW fine on Bithumb, citing transactions with undeclared overseas VASPs and inadequate customer due diligence, marking another high-intensity penalty by the regulator.
But on April 30, the Seoul Administrative Court also accepted Bithumb's application for a stay of execution, suspending the effect of the 6-month partial business suspension until 30 days after the final judgment in the main case. The court reasoned that if the penalty were enforced, Bithumb might suffer the effects of the suspension during the trial period. Even if the penalty were later overturned, negative impacts like restricted new client acquisition and reputational damage could not be fully recovered.
Following these legal battles, the FIU's enforcement logic is facing sustained counterattacks from exchanges in the judicial arena. For the FIU, its past reliance on administrative penalties to drive industry compliance is now encountering higher procedural and evidentiary requirements.
Industry Self-Regulatory Body DAXA Protests "Poison Pill Clause"
Beyond actively defending platform rights in court, South Korean exchanges have also opened a "second front" by directly challenging legislation and administrative rules.
Korean financial authorities are advancing revisions to the Act on Reporting and Use of Specific Financial Transaction Information (Specific Financial Information Act), aiming to further strengthen mechanisms for crypto asset transfers, customer verification, the Travel Rule, and STRs. One provision, which could subject all crypto asset transfers over 10 million KRW (approximately $6,800) to mandatory STR reporting, has sparked strong industry backlash.
The Digital Asset eXchange Alliance (DAXA), the self-regulatory body of South Korea's five major cryptocurrency exchanges, was the first to label this a "poison pill clause," arguing that its STR standard might violate the principle of legality. Under the current Specific Financial Information Act, the logic for STRs is that financial institutions report when they have reasonable grounds to suspect a transaction involves illegal proceeds or money laundering. However, the industry interprets the revision as mandating reports to the FIU for any crypto transfer exceeding 10 million KRW. DAXA contends this essentially creates a new reporting obligation based solely on amount through subordinate legislation, exceeding the scope authorized by the superior law.
Alongside this principled stance, DAXA also calculated the potential operational impact on exchanges. According to DAXA's simulation, if this rule is implemented, the annual number of STRs from South Korea's five major KRW-based exchanges would surge from the current approximately 63,000 to about 5.445 million—an increase of roughly 85 times. This massive volume could effectively paralyze normal AML monitoring systems.
These numbers touch on the very essence of the STR system. The value of STRs originally lies in "suspicion-based screening": exchanges identify anomalous transactions based on factors like customer identity, fund source, transaction path, on-chain address risk, and behavioral patterns, then report them to the FIU. However, if a large volume of regular large transfers are included in STRs merely for exceeding a monetary threshold, the reporting system would be flooded with low-quality signals, potentially reducing the FIU's capacity to process genuinely high-risk transactions.
This is the core of the industry's argument that "excessive regulation may actually weaken AML efficiency." DAXA is not opposing AML strengthening per se but argues that regulation should preserve a risk-based approach rather than simplifying "suspicious transaction reporting" into a one-size-fits-all rule based on transaction amount.
South Korea's Crypto Regulation: "Legislative Shortcomings" and "Overly Dense Enforcement"
South Korea's cryptocurrency regulation has long had a structural contradiction. On one hand, it is one of the world's most active crypto trading markets, with high retail trading volume, concentrated exchange dominance, and significant influence of the KRW market. On the other hand, its comprehensive regulatory framework—including a Digital Asset Basic Act and regulations for stablecoins, exchanges, and issuers—is not yet fully mature. Much regulatory action has primarily relied on the Specific Financial Information Act, the AML system, and FIU enforcement.
This model had practical rationale in the early stages. The crypto industry carries high risks, with scams, cross-border money laundering, undeclared overseas platforms, and anonymous on-chain transfers requiring strong regulatory intervention. Bringing exchanges under regulation through AML obligations via the FIU was a crucial step in establishing order in South Korea's crypto market.
In the past, South Korean crypto exchanges facing FIU penalties mostly responded through explanations, defenses, and corrections within administrative procedures. Now, the industry is pushing disputes into courts and legislative opinion procedures. This signals that South Korea's crypto regulation is entering a new phase: regulators are no longer the sole rule-makers and enforcers; their interpretation of rules, basis for penalties, and procedural fairness are also being scrutinized by exchanges, industry associations, and the courts.
At a deeper level, the resistance and challenges from leading South Korean exchanges against regulators represent a recalibration of the regulatory paradigm. Ultimately, this conflict aims to resolve how regulation can become more sustainable.
In the short term, the tug-of-war between the FIU and exchanges may intensify. The Dunamu case is under appeal, Bithumb's main lawsuit is ongoing, and revisions to the Specific Financial Information Act still have room for adjustment. In the long run, however, this conflict may contribute to South Korea developing a more mature cryptocurrency regulatory framework.
