South Korea Crypto Exchanges Warn AML Rules Could Backfire

South Korea’s digital asset sector is raising concerns over proposed anti-money laundering (AML) reforms, warning that new reporting requirements could significantly strain compliance systems and create operational uncertainty across the industry.

According to local reports, the Digital Asset eXchange Alliance (DAXA), which represents major domestic exchanges, has formally submitted feedback on planned amendments to the country’s financial reporting framework. The proposals, introduced by regulators earlier this year, aim to tighten oversight of cross-border crypto transactions.

Sharp Increase in Reporting Burden

At the center of the debate is a provision that would require virtual asset service providers (VASPs) to flag all overseas-linked crypto transfers exceeding 10 million Korean won (approximately $6,800) as suspicious transactions, regardless of their risk profile.

Industry participants argue that such a blanket requirement could lead to an overwhelming surge in reporting volumes. DAXA estimates that suspicious transaction reports filed by the country’s five largest exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, could increase dramatically, from roughly 63,000 cases last year to more than 5.4 million annually.

Such a jump, the group says, would make it difficult for exchanges to process reports effectively and could dilute the usefulness of AML monitoring by flooding systems with low-risk transactions.

Concerns Over Expanding Compliance Obligations

Beyond reporting thresholds, DAXA has also raised objections to additional requirements that would compel exchanges to verify the accuracy of customer information more extensively. Industry representatives argue that these obligations go beyond what is explicitly outlined in existing legislation, effectively expanding compliance expectations through secondary rules.

The pushback highlights a growing tension between regulators and market participants, as authorities seek to strengthen AML controls while exchanges warn that the scope and scale of the proposed measures may exceed practical limits.

The amendments were introduced by the Financial Services Commission (FSC) and the Financial Intelligence Unit (FIU) in late March, with a public consultation period running through May 11. Final rules are expected to be determined following further legal and regulatory review.

Legal Disputes Add Pressure to the Sector

The regulatory debate comes at a time when several major exchanges are already engaged in legal challenges against AML-related sanctions imposed by authorities.

In April, Dunamu, the operator of Upbit, secured a court ruling that temporarily overturned a three-month partial business suspension linked to alleged compliance failures, including issues related to customer due diligence and dealings with unregistered foreign platforms. However, regulators have since appealed the decision.

Meanwhile, Bithumb has obtained a suspension of enforcement on a separate six-month penalty, pending the outcome of ongoing legal proceedings. Similar relief has been granted to Coinone, which is contesting sanctions tied to customer verification practices and transactions involving unregistered overseas providers.

Balancing Oversight and Practicality

The ongoing dispute underscores a broader challenge facing regulators globally: how to enhance oversight of digital asset markets without imposing requirements that may prove difficult to implement at scale.

For South Korea, which has one of the most active crypto markets in Asia, the outcome of these discussions could shape the next phase of regulatory policy. Industry participants are not opposing stronger AML controls outright, but are calling for a more risk-based approach that preserves the effectiveness of monitoring systems while remaining operationally viable.