South Korea Targets Crypto Hacks With Strict Liability Rules

South Korea’s largest cryptocurrency exchange, Upbit, has been in the headlines for multiple weeks after suffering a $28 million hack. The hackers nearly stole 44.5 billion, and the users’ assets accounted for about $28 million of the total loss, with the remainder being corporate funds. Following the Upbit hack, the South Korean law structure revealed that they do not have a legal basis to penalize exchanges or mandate user compensation. Many users affected by the hack believed that the government might force compensation or payback. But South Korea does not have a specific law to punish crypto exchanges for being hacked and requires exchanges to compensate users for their losses.    

Following the Upbit incident, South Korean regulators are now pushing for No-Fault Liability rules on cryptocurrency exchanges. The Financial Services Commission is all set to include safety measures in the legislation for virtual assets. No‑fault liability on cryptocurrency exchanges is a rule requiring compensation to affected users without proving negligence or wrongful conduct by the service providers. The Virtual Asset User Protection Act (Phase 1 Act), which is currently in effect within the country, does not have provisions regarding hacking incidents similar to Upbit. The lack of provisions led some to believe that incidents like the Upbit hack do not end up in heavy penalties and mandatory compensation. According to the South Korean media, the administration plans to supplement virtual asset legislation in a two-stage process, with phase 2 strengthening the virtual asset legislation and enforcing financial-grade security standards, and enabling fines up to 3% of annual revenue.   

No‑fault Liability Boosts Investor Confidence In South Korea’s Crypto Market

The Financial Services Commission was currently reviewing a plan to include a clause in the ‘Phase 2 Virtual Asset Legislation’ that would hold virtual asset operators liable for damages without fault in the event of hacking or computer accidents, South Korean media Yonhap reported. Under the newly proposed rules, the cryptocurrency exchanges must compensate users for financial losses from hacking or network breaches. According to the latest plan, liability applies regardless of the service providers’ fault unless users engage in gross negligence.  According to the existing Electronic Financial Transactions Act (EFT), financial institutions and electronic financial service providers are obliged to compensate users for damages due to network hacks and security breaches. However, the EFT does not apply to virtual asset operators like cryptocurrency exchanges, including Upbit. 

The newly introduced No-Fault Liability on virtual asset service providers will change the narrative and protect the users’ funds, increasing trust and confidence among the investors. Based on the newly proposed plans,  the No-Fault Liability will have two major direct consequences: an obligation to reimburse users in case of hacking, and the reimbursement is mandatory even if the platform is not at fault. Analysts are considering the move from South Korea as revolutionary, and the prominent crypto analyst page on X Crypto Aman posted that the level of user protection would now become quite strict and that this rule could change the way global crypto exchanges operate. Financial Supervisory Service Governor Lee Chan-jin stated at a press conference that trust in safety and system security were the lifeblood of the virtual asset market and that they were strengthening these aspects in the second phase of virtual asset legislation.