South Korean Regulator Will Shield Exchanges That Freeze Funds at the First Sign of a Hack

South Korea’s Financial Services Commission (FSC), the country’s financial regulator, said on Thursday, Nov. 12, that it has decided to issue a no-action letter so crypto exchanges can block deposits and withdrawals when they suspect a hack. A no-action letter is a regulator’s written assurance that it won’t take enforcement action over a specific practice.

The letter hasn’t been issued yet. The FSC’s release, published in Korean, gives no issue date and says the freezes would be allowed under certain conditions that it didn’t spell out.

Under the Virtual Asset User Protection Act, exchanges may not block deposits and withdrawals without a justifiable reason, and a block is permitted only once a hack has clearly occurred. Exchanges had said it was unclear whether they could freeze funds earlier, such as on an abnormal transaction, according to the release. The FSC pointed to the Binance hack as a case showing that blocking fast is decisive in limiting harm to users. Binance put its losses from hot wallets, which exchanges keep online, at $6.3 billion in late October.

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The GOPAX freeze

The release doesn’t mention GOPAX, the Korean exchange that halted trading and crypto deposits on Friday, Nov. 6, and moved withdrawals to emailed requests approved by hand. Yonhap reported that GOPAX acted after an email from a group saying it had breached the exchange. GOPAX operator Streami was among the exchanges at Thursday’s meeting. By our read, GOPAX froze on a threat it said it hadn’t confirmed: the suspected-hack stage the industry told the FSC the law leaves unclear, which the planned letter is meant to cover.

Cold wallets and monitoring

Vice Chairman Shin Jin-chang chaired the meeting, which also produced an emergency security guideline. Exchanges are to monitor for incidents around the clock. An exchange whose monitoring and response system can’t run nonstop should limit deposits and withdrawals to the hours when that system works normally, and announce those hours beforehand.

Korean rules require exchanges to keep 80% of users’ crypto in cold wallets, storage kept off the internet. The FSC said the share across all operators is 95% or more. It also told exchanges to keep users’ crypto in hot wallets to the minimum needed to support trading, and to carry enough insurance and reserves to compensate users after a hack.

Only five of the country’s 28 crypto businesses, all of them exchanges in the won market, where crypto trades against the Korean won, have joined the Financial Security Institute, which will provide member firms with threat sharing and security inspections, according to the release. The FSC said it will push more to join. The regulator asked exchanges to hold more crypto offline at a meeting earlier this month.

AI-assisted content: This article was produced with the assistance of AI tools and was reviewed, edited, and fact-checked by a member of the Unchained editorial team before publication.