Major South Korean Crypto Exchanges Like Upbit and Bithumb Face First-Ever FSS Inspection Under New Law

FSS Targets Virtual Asset Exchanges for First Inspection Under New Regulations

Announced today, the Financial Supervisory Service (FSS) of South Korea is set to embark on its first inspection of virtual asset exchanges following the implementation of the Virtual Asset Users Protection Act in July 2024.

This inspection marks a significant step in enforcing the new regulatory framework, which introduced stringent penalties for illegal transactions, including life imprisonment for those accumulating over 5 billion won ($3.7 million) through illicit activities.

Targeted Scrutiny of Korean Won-Based Exchanges

The FSS has specifically identified major Korean won-based cryptocurrency exchanges such as Upbit, Bithumb, Coinone, Gopax, and Korbit as key targets for this initial wave of inspections.

These platforms are being scrutinised due to their prominent market positions and the detection of "unusual cases" during preliminary reviews.

The selection of these exchanges reflects their substantial influence in the Korean cryptocurrency market and underscores the regulatory body's commitment to ensuring compliance among high-profile players.

Additional Exchanges and Wallet Providers Under the Microscope

In addition to these leading exchanges, the FSS plans to extend its oversight to three other cryptocurrency exchanges and one cryptocurrency wallet provider.

This broader approach aims to encompass a range of virtual asset service providers (VASPs) and ensure that various facets of the industry adhere to the new regulatory standards.

The inspection will also remain flexible, allowing for the inclusion of additional exchanges should any complaints or issues arise.

Regulatory Compliance and Market Impact

The core of the FSS's inspection will involve a thorough examination of compliance with regulations designed to protect virtual asset users.

This includes verifying the adequacy of user asset storage and management practices, assessing the appropriateness of management contracts with institutions such as banks, and ensuring the rational calculation and payment of deposit usage fees.

The inspection will also focus on the segregation of user assets from the exchange’s own holdings and the management of cold wallets.

Insurance and Reserve Fund Adequacy

Another critical aspect of the inspection will be evaluating the adequacy of insurance coverage and reserve funds.

Exchanges will be checked for compliance with requirements related to accident responsibility, including potential hacks.

This will involve reviewing the insurance policies in place and assessing the accumulation of reserve funds intended to cover unforeseen incidents.

Internal Controls and Preventative Measures

The FSS will also target exchanges with poor financial health and weak internal controls related to cryptocurrency storage.

These operators will be subject to on-site inspections to assess their ability to manage user assets effectively and adhere to internal control standards.

Particular attention will be given to the internal controls governing asset storage and the effectiveness of preventative measures against potential mismanagement or theft.

Monitoring for Unfair Practices

In addition to these areas, the FSS will monitor for compliance with regulations related to unfair trading practices.

This includes examining the mechanisms in place for detecting and addressing irregularities in price and trading volume.

The regulator will assess the ongoing monitoring systems, the establishment and operation of dedicated oversight teams, and the criteria used for identifying suspicious transactions.

The financial regulator stated,

“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.”

The FSS will also review the reporting and notification systems for unusual trading activities to ensure they are functioning as intended.

Enforcement and Future Adjustments

The FSS has emphasised that it will operate a flexible and responsive inspection system.

Immediate action will be taken in response to urgent issues reported or detected during inspections.

The regulator has pledged to impose strict penalties for any illegal activities uncovered and will advocate for regulatory revisions where improvements are deemed necessary.

Through this comprehensive approach, the FSS aims to reinforce market order and enhance the protective measures for users within South Korea’s virtual asset sector.