Key Takeaways:
- South Korea could temporarily restrict crypto exchange withdrawals during hacks.
- FSC desires 24/7 monitoring and increased hot-wallet controls.
- Optimized security checks will be expanded over wallets, blockchains and smart contracts.
South Korea is seeking to allow crypto exchanges greater leeway as a suspected hack could result in an actual loss.
The Financial Services Commission said on Nov. 12 that it plans to issue regulatory guidance allowing exchanges to suspend deposits and withdrawals when abnormal activity points to a possible security breach. The move fits into a broader strategy to bring the crypto security standards in line with those for traditional financial institutions.
Exchanges Could Freeze Transfers Before a Hack Is Confirmed
Under South Korea’s current Virtual Asset User Protection Act, platforms cannot restrict deposits or withdrawals without a legitimate reason. If a confirmed hacking event occurs, a suspension is warranted but the question had remained unclear of what exchanges could do if suspicious activity occurred before a hack was verified.
The FSC is now looking to fill that void. The regulator will issue a no-action position for preventive restrictions when there is a reason to believe that there is any hacking or unauthorized access. The intent is to evolve the exchanges quickly enough to minimize customer losses, rather than wait until the intrusions are well under way.
The strategy comes amid recent threats to the security of South Korea. GOPAX announced a hacker attack threat on Nov. 6, but deposits, withdrawals and trading were still suspended.
Read More: South Korea Tightens Crypto Exchange Defenses After Binance’s $6.3B Security Breach
Cold Wallets and 24/7 Monitoring Move Higher on the Agenda
The FSC also would like exchanges to keep abreast of continuous monitoring adapted to the 24/7 trading world of crypto.
There should be staff on the platform to identify abnormal transactions and effective controls put in place right away. This leaves exchanges which are incapable of performing continuous monitoring to process deposits and withdrawals at periods where sufficient security personnel are available.
The South Korea government was already pushing for VASPs to store at least 80% of their customers’ virtual assets in cold wallets. FSC said the cold-storage ratio in the industry is already over 95% and the role-players should maintain the hot wallet ratio as little as necessary to facilitate business as usual.
The regulator also advised exchanges to keep their hot wallet money in more than one wallet and have adequate insurance and reserves to pay the users in the event of a breach.
Crypto Security Checks Are Set to Expand
There will also be greater involvement with the Financial Security Institute. The FSC says only five exchanges among 28 virtual asset services have joined the institute in winning its approval. Operators now want to be part of the participation, and authorities are now looking to offer threat intelligence, vulnerability assessments and cybersecurity training to more operators.
The institute is also projected to improve the criteria for transaction checks, wallet access security, integrity of blockchain and smart contract.
The FSC is also developing more comprehensive digital finance laws that would impose cybersecurity requirements akin to those in banking regulations on virtual asset providers. Regulators also want suspected breaches and abnormal external access attempts reported quickly to financial authorities.
Read More: South Korea Targets 2027 Tokenized Securities Launch with Stablecoin Settlement Vision
