South Korea is moving toward one of the toughest consumer protection regimes in the global crypto industry, weighing a “no-fault” compensation system that would make exchanges financially responsible for hacks and IT failures regardless of whether negligence can be proven.
Under the draft plan, cryptocurrency trading platforms operating in the country would be legally obligated to fully reimburse customers for losses arising from security breaches or technical breakdowns. The only exception would be cases where users are found to have acted with clear gross negligence themselves, such as willingly handing over passwords or private keys.
The initiative is being driven by the Financial Services Commission (FSC), South Korea’s top financial regulator, which aims to align protections for digital asset investors with those long established for traditional bank and electronic payment customers. Officials say the model is designed to mirror the liability rules that already govern card issuers, payment processors, and online banking services, where consumers are typically compensated promptly after unauthorized transactions.
At the heart of the proposal is a “no-fault liability” standard. This means that customers would not have to prove that an exchange’s systems or staff were negligent in order to be repaid. Instead, the baseline assumption would be that the platform must cover losses resulting from hacks or operational disruptions. The burden would effectively shift to exchanges, which would need to show that a user’s own extreme carelessness caused the loss if they wish to deny compensation.
The regulatory push has gained momentum after a high-profile security incident at Upbit, one of South Korea’s largest and most influential crypto exchanges. The breach exposed serious vulnerabilities and highlighted gaps in the current supervisory framework, in which digital asset trading platforms are not fully held to the same standards as traditional financial institutions.
“System security is the lifeline of virtual asset markets,” said Lee Chan-jin, Governor of the Financial Supervisory Service, underscoring regulators’ growing view that crypto infrastructure must be treated as critical financial plumbing rather than a lightly supervised tech experiment. The proposed rules are intended to make that principle legally enforceable.
One of the key problems regulators are trying to solve is the legal vacuum surrounding user compensation. At present, cryptocurrency exchanges in South Korea do not fall under the Electronic Financial Transactions Act, a core piece of legislation that governs how banks and payment firms must protect customers and respond to fraud or system errors. Because of that exclusion, authorities have limited power to order reimbursement after crypto-related security incidents, even when many users are affected.
Data collected on the sector illustrates why policymakers are increasingly worried. Between 2023 and September 2025, the country’s five largest exchanges reported 20 separate IT-related incidents affecting more than 900 customers. These events range from service disruptions to security breaches that resulted in asset losses.
Upbit alone logged six incidents impacting 616 users over that period. Bithumb reported four incidents that hit 326 users, while Coinone disclosed three incidents affecting 47 users. In one notable case on November 27, Solana-based tokens were drained in under an hour, demonstrating how quickly attackers can move once they gain access to a vulnerable system.
These disruptions have unfolded against a backdrop of softer retail trading activity on South Korean centralized exchanges. Market data for the recent quarter show that local trading flows have slowed, even as global risk assets have swung sharply amid shifting expectations about monetary policy in the United States. While it is difficult to draw a direct line from specific hacks to overall volumes, repeated incidents have clearly dented confidence among some domestic investors.
If implemented as described, the no-fault liability scheme would position South Korea at the forefront of crypto consumer protection. Legal experts specializing in digital assets note that only a handful of jurisdictions have gone so far as to require exchanges to bear near-automatic responsibility for losses, and most still structure compensation around proving some form of fault or regulatory breach. South Korea’s approach would therefore rank among the strictest frameworks worldwide.
For exchanges, the impending shift implies a major overhaul of risk management, capital planning, and cyber defense strategies. Platforms may need to hold larger reserves or purchase specialized insurance products to ensure they can cover user claims in the event of a large-scale hack. They are also likely to invest more heavily in penetration testing, security audits, real-time monitoring, and incident response teams to prevent attacks before they occur.
Operational resilience will become just as important as cybersecurity. Under a no-fault regime, prolonged outages, data corruption, or system malfunctions that result in client losses could be as costly as direct theft. Exchanges might need to upgrade infrastructure, adopt more redundant systems, and formalize disaster recovery plans. For some smaller or undercapitalized platforms, the cost of compliance could be significant and may prompt consolidation in the market.
From the user’s perspective, the proposed rules could substantially reduce the personal risk associated with holding assets on centralized exchanges. Currently, many retail investors are left uncertain about whether they will be made whole after an incident and how long any reimbursement process might take. A clear legal obligation on exchanges to compensate customers could make centralized trading venues appear closer in safety to online banking or card services.
However, stronger protections do not eliminate all risks. Regulators and policy analysts warn that guaranteed compensation might encourage some users to pay less attention to their own security practices, assuming that losses will always be covered. That is why the exception for “gross negligence” is critical: if a user willingly participates in obvious scams, discloses passwords, or ignores clear security warnings, exchanges may be able to refuse reimbursement.
The move also reflects a broader trend in South Korea’s approach to digital finance. Over the past several years, authorities have steadily tightened oversight of crypto businesses, requiring them to comply with anti-money-laundering rules, partner with licensed banks for real-name accounts, and undergo more rigorous reporting. The no-fault liability proposal is the latest indication that regulators see digital assets as part of the mainstream financial system, not a fringe market.
Internationally, other regulators are watching South Korea’s experiment closely. If the policy succeeds in protecting consumers without driving activity offshore or stifling innovation, it could become a model for countries debating how to handle crypto-related losses. Conversely, if exchanges struggle to shoulder the burden or if trading migrates to less regulated foreign platforms, policymakers elsewhere may take a more cautious view.
There is also an important competitiveness angle. Exchanges that can demonstrate robust security and a proven ability to comply with strict compensation rules may gain an edge in attracting both domestic and international users. A reputation for safety can be a powerful differentiator in a market where high-profile hacks and insolvencies have eroded trust.
For developers and projects building within the Korean ecosystem, the regulatory tightening may have mixed effects. On one hand, users who feel more protected could be more willing to experiment with tokenized products, DeFi access via centralized gateways, or new digital asset offerings. On the other hand, listing standards and technical due diligence are likely to become stricter, potentially slowing down the path from project launch to public trading.
Industry participants are also preparing for more detailed guidance around how compensation claims will be handled in practice. Questions remain about timelines for payouts, documentation requirements, the treatment of partial losses, and whether there will be caps in extreme cases. The answers will shape how exchanges design their customer contracts, disclosures, and internal procedures.
Another key issue is how to define and verify “gross negligence” by users. Regulators will need to draw boundaries that protect consumers from unfair denial of claims while still holding them accountable for reckless behavior. Clear standards will be needed to prevent disputes and ensure consistent application across different platforms.
For now, the message from South Korean authorities is unambiguous: if exchanges want to benefit from serving a large and active digital asset market, they must be prepared to shoulder bank-like responsibilities when things go wrong. The era when platforms could externalize most of the cost of hacks and technical failures onto their users appears to be coming to an end.
As the legislative process unfolds, exchanges operating in South Korea will be closely scrutinizing the final wording of the law and any accompanying regulations. Investors, meanwhile, are watching to see whether the promise of stronger protections translates into renewed confidence and higher participation in the country’s crypto markets, or whether the industry undergoes a period of consolidation and adjustment under the weight of stricter rules.