South Korea requires exchanges to provide no-fault compensation along with equity restrictions, officially entering bank-level regulation!

South Korea plans to classify large exchanges as critical infrastructure, restrict major shareholders’ holdings, and strengthen stablecoin and compensation responsibilities, potentially reshuffling the management rights of Upbit and Bithumb.

Introducing a major shareholder qualification review mechanism, Upbit and Bithumb face management reshuffling

South Korea’s virtual asset market is undergoing the most stringent regulatory overhaul in history. According to the “Second Phase Virtual Asset Act” proposal submitted by the Financial Services Commission (FSC) to the National Assembly, regulators plan to officially designate cryptocurrency exchanges with over 11 million users as “critical infrastructure.” The core aim is to break the current absolute monopoly of a few founders or major shareholders over exchanges.

The FSC explicitly states in the proposal that the massive transaction fee revenues generated by large exchanges are currently overly concentrated in the hands of a few intermediaries. To enhance market transparency and prevent conflicts of interest, they propose introducing a major shareholder qualification review system similar to the “Alternative Trading System (ATS)” in traditional financial markets, and strictly limit major shareholders’ holdings to between 15% and 20%.

Once this shareholding cap is implemented, it will directly impact the operational structure of South Korea’s leading exchanges. For example, Dunamu, the operator of Upbit, whose chairman Song Chi-hyung currently holds about 25%, will be forced to sell at least 10% of his shares on the open market or through private agreements once the regulation takes effect.

The impact on Bithumb and Coinone is even more significant. Coinone’s chairman Cha Myung-hoon currently holds as much as 54%, meaning he must sell over 34% of his stake to comply; Bithumb’s parent company holds a 73% stake, which could trigger a large-scale change in management control.

Industry insiders generally worry that while this forced dilution of power could improve transparency, it may also lead to operational instability of exchanges and weaken South Korea’s crypto companies’ competitiveness in the international market.

Stablecoin issuance deadlock and the 51% rule controversy spark innovation debates

Beyond exchange ownership structures, South Korean regulators are also embroiled in a fierce debate over the issuance rights of “stablecoins,” which has delayed the passage of the Digital Asset Basic Act (DABA) until 2026.

According to Yonhap News Agency, the core of the dispute lies in the power struggle between the Bank of Korea (BOK) and the FSC. The BOK insists on the so-called “51% rule,” claiming that the entity issuing stablecoins pegged to the Korean won must hold more than 51% of the shares in banks.

The central bank believes that stablecoins are closely linked to the traditional monetary system, and only banks with strict regulation, high solvency, and anti-money laundering (AML) standards can effectively hedge potential systemic financial risks and protect monetary sovereignty.

However, the FSC and ruling party (Democratic Party) oppose this view, arguing that such an exclusive threshold would stifle innovation among tech companies. The FSC cites the EU’s MiCA regulation and Japan’s regulatory model as references, emphasizing that many fintech firms with blockchain advantages should be allowed to participate in the stablecoin market, rather than being monopolized by traditional banks.

Additionally, foreign stablecoin issuers (such as Circle, which issues $USDC ) are also a point of contention. According to the preliminary draft, foreign issuers must establish a branch or subsidiary in South Korea and obtain operational permits to operate legally within the country. This deadlock over “who can control fiat-pegged tokens” is expected to persist until 2026, ultimately shaping the long-term layout of South Korea’s digital payment ecosystem.

Building a bank-level consumer protection network, exchanges to bear no-fault compensation

To rebuild public confidence in the virtual asset market, the South Korean government plans to implement consumer protection measures comparable to those in traditional finance.

According to the bill details, stablecoin issuers will be required to escrow 100% of their reserve assets with authorized institutions such as banks, and these assets must be limited to bank deposits or government bonds, ensuring that in cases of issuer bankruptcy or extreme situations, investors’ assets are protected.

Furthermore, virtual asset service providers (VASPs) will face unprecedented financial liability requirements. The FSC has announced plans to implement a “no-fault compensation rule,” meaning that if a exchange suffers a hacking attack, systemic technical failure, or human error resulting in user losses, the exchange must bear full compensation without the need to prove fault.

This strict legal responsibility aims to encourage exchanges to establish higher standards of cybersecurity and insurance mechanisms. The bill also imposes strict regulations on advertising standards, service terms, and information disclosure obligations for virtual assets, approaching the level of traditional banks and brokerages.

Since President Lee Jae-myung took office, he has regarded the development of the stablecoin market as a key strategy to protect monetary sovereignty and counter the dominance of the US dollar. To balance the impact of strict regulation, the government is also considering including provisions to reopen domestic initial coin offerings (ICOs). Although ICOs have been banned since 2017, if the new law can establish a rigorous information disclosure and risk management review standard, it may enable capable domestic blockchain projects to get back on track.

Balancing regulation and industry growth, legal restructuring under the shadow of the Do Kwon incident

South Korea’s crypto regulation has become extremely strict largely due to major market crashes over the past few years, especially the chain reaction triggered by Terraform Labs co-founder Do Kwon. With Do Kwon sentenced to 15 years in prison in the US and facing up to 40 years in South Korea, regulators realize the need to establish a preventative legal framework.

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In addition to restrictions on large exchange shareholdings, the government is gradually easing some restrictions to promote growth, such as recently lifting the ban on venture capital (VC) investments in crypto companies and allowing international exchanges like Binance to re-enter the market through acquisitions of local platforms like Gopax.

By limiting major shareholders’ holdings to between 15% and 20%, implementing bank-level reserve management, and strengthening no-fault liability, the South Korean government is trying to find a dynamic balance between “encouraging innovation” and “financial stability.”

Although this may cause pain and power reshuffling for core companies like Upbit and Bithumb, in the long run, this system will align South Korean exchanges’ operational standards with traditional financial institutions, increasing transparency and reducing individual operational risks.

As the full implementation deadline of the 2026 law approaches, South Korea’s crypto industry will officially bid farewell to its wild growth era and enter a new epoch dominated by strict regulation and federal legal frameworks.