Virtual asset sector enters tense phase ahead of sanctions against Upbit

By Jun Ji-hye

Tension is mounting in the virtual asset industry as it braces for a series of inspections and sanctions by financial authorities. The virtual asset market was brought under the nation's regulatory framework last July with the implementation of the Act on the Protection of Virtual Asset Users.

Financial authorities are currently proceeding with sanctions against the country’s largest cryptocurrency exchange, Upbit, over alleged violations of customer identification protocols and transactions with unregistered virtual asset operators.

Since launching an on-site inspection into Upbit last August, the Financial Intelligence Unit (FIU) under the Financial Services Commission (FSC), the country’s financial watchdog, has reportedly uncovered hundreds of thousands of cases involving breaches of Know Your Customer obligations.

Financial institutions are required to verify identification, such as ID cards, to confirm the real identity and transaction purpose of their clients as part of anti-money laundering efforts. However, Upbit is alleged to have conducted this process inadequately.

Authorities are also reportedly investigating the exchange’s dealings with unregistered virtual asset operators.

Unregistered virtual asset operators refer to exchanges that operate without registering as virtual asset businesses under the country’s Act on Reporting and Using Specified Financial Transaction Information. These operators primarily include overseas exchanges conducting business with domestic users.

During the on-site inspection, multiple cases were reportedly identified where Upbit members transferred virtual assets to exchanges classified as unregistered virtual asset operators.

Potential sanctions against Upbit include restrictions on virtual asset withdrawals for new customers, penalties for executives and employees and fines.

The FIU expects to finalize the sanctions after receiving explanations from Dunamu, the operator of Upbit, during the sanctions review committee meeting on Tuesday.

During this process, the level of sanctions may change. There is also the possibility of holding multiple additional review sessions in the future.

“Nothing has been decided yet, as the sanction procedures are still ongoing,” an FSC official said.

Regarding the issue, a Dunamu official also said, “We will provide a thorough explanation through the upcoming procedures, including the sanctions review committee.”

News of potential sanctions against Upbit has put the virtual asset industry on high alert, as additional sanctions against other exchanges are expected to follow sequentially.

The FIU completed on-site inspections of Upbit, Korbit and GOPAX last year, with Bithumb and Coinone next in line for review this year.

“If a major player like Upbit faces sanctions, smaller virtual asset exchanges will inevitably feel even greater pressure,” an official from one of the domestic exchanges said.