South Korea Initiates Crypto Exchange Inspection for Illegal Practices

South Korea’s Financial Supervisory Service (FSS) announced on Tuesday its plans to inspect cryptocurrency exchanges to uncover any illegal or unfair practices. This marks the first inspection since the stricter regulations under the Virtual Asset Users Protection Act were implemented in July.

The inspection aims to detect suspicious transactions and ensure that exchanges comply with rules for protecting virtual assets and maintaining proper transaction records. According to the FSS:

"The FSS will establish market order through stern punishment against illegal activities that may be identified in the process of its inspection, and will push for the revision of regulations if necessary by identifying the areas in the system where improvements are needed".

Initially, the review will focus on two crypto exchanges dealing in the Korean won, flagged for “unusual cases” in previous evaluations. Under the new act, individuals who profit over 5 billion won ($3.7 million) through illegal virtual asset transactions can face penalties as severe as life imprisonment.

In addition, three more crypto exchanges and one wallet provider will be inspected. The FSS also warned that other exchanges could be investigated if issues or complaints arise.

On July 19, South Korea’s Virtual Asset User Protection Act took effect, outlining measures to safeguard cryptocurrency investors. These include insurance against hacks and attacks on crypto assets, and the separation of customer assets from exchange holdings.

The FSS is authorized to inspect Virtual Asset Service Providers (VASPs) for compliance with user protection duties, while the FSC has the authority to sanction rule-breakers by issuing corrective orders, suspending business operations, imposing fines, and more.

Top crypto exchanges in South Korea, such as Upbit, Bithumb, and Coinone, must adhere to strict anti-money laundering (AML) measures and report suspicious transactions to regulators. While cryptocurrencies like Bitcoin (BTC) are subject to AML and securities regulations, reporting requirements for crypto service providers in South Korea are primarily based on guidelines rather than formal laws.

South Korea's heightened scrutiny reflects a growing global trend. In Hong Kong, operating an unlicensed virtual asset trading platform became a criminal offense as of June 1. Some applicants have received initial approval but have yet to be fully licensed. In July, Coinbase's UK branch was fined £4.5 million by British regulators for breaching a voluntary agreement related to user onboarding.