South Korea’s Upbit Under Investigation for Anti-Money Laundering Breaches, Heavy Sanctions Loom

South Korea’s Financial Intelligence Unit (FIU) has issued a suspension notice to Upbit, the country's largest crypto exchange, for allegedly failing to comply with anti-money laundering (AML) regulations.  According to a local report, the exchange violated customer identification system requirements, commonly known as Know Your Customer (KYC) protocols. The Financial Services Commission (FSC) notified Upbit on January 9 regarding the sanctions, citing breaches of the Specific Financial Transaction Information Act. Possible Business Suspension The sanctions, if confirmed, will prevent Upbit from onboarding new customers for up to three months. The exchange has clarified that the restrictions primarily apply to new users transferring digital assets outside the platform. However, existing customers will not face any disruptions to trading activities. Currently, Upbit controls over 70% of South Korea’s crypto market by trading volume. Notably, Upbit has until January 20 to submit its response to the FIU. Following this, the regulatory body will hold a sanctions hearing on January 21 to finalize the decision, including the duration of the suspension. Other South Korean crypto exchanges are closely monitoring the situation, as it could signal stricter enforcement measures within the industry. The move aligns with the FSC’s broader efforts to address illegal market activities since implementing the Virtual Asset User Protection Act. KYC Compliance Failures and Potential Fines During its review process, the FIU identified approximately 700,000 cases where Upbit did not fully implement KYC procedures. These checks are a crucial part of AML and counter-terrorism financing (CTF) measures. The Special Financial Transactions Act allows regulators to impose fines of up to 100 million won per violation of KYC requirements. The financial sector is now focusing on the scale of potential monetary penalties that Upbit might face alongside the operational restrictions. Additionally, the FIU determined that Upbit engaged in transactions with unreported overseas virtual asset service providers. South Korean law prohibits such dealings unless the counterparties are officially registered. The regulator found Upbit in violation of this provision and factored it into the imposed sanctions. The exchange has responded by stating that identifying unregistered foreign operators in advance was challenging due to the decentralized nature of blockchain transactions. Impact on Upbit’s License Review The regulatory scrutiny comes at a crucial time for Upbit, as its business license renewal remains under review. The exchange renewed its license in October 2023, but the FIU has been conducting on-site inspections.  The latest enforcement action could influence the outcome of the license review process, raising concerns about the exchange’s long-term operational status in South Korea.