South Korean Crypto Exchange Upbit Faces Regulatory Scrutiny over KYC Violations

South Korea’s leading cryptocurrency exchange, Upbit, has come under intense scrutiny from the Financial Intelligence Unit (FIU) over alleged massive violations in Know Your Customer (KYC) procedures.

The regulator discovered the alleged KYC breaches while assessing Upbit’s business license renewal. This development could impact the exchange’s activities in the country.

Upbit Faces KYC Violation Allegations

In South Korea, cryptocurrency exchanges or virtual asset service providers (VASPs) are obligated to establish strict KYC procedures.

KYC is a process that verifies customer identity, and it is implemented by crypto exchanges and other entities for anti-money laundering (AML) or counter-terrorist financing (CTF). Users are required to open real-name accounts and complete the necessary KYC verification steps before being able to deposit, trade, or withdraw funds.

However, the regulator recently discovered that Upbit failed to comply with the procedure. They found about 500,000 to 600,000 cases of suspected customer verification violations. For instance, the exchange allegedly allowed users to open accounts using IDs with blurred personal data such as names and registration numbers, which did not allow regulators to properly identify them.

In many cases, accounts created without proper KYC authentication may be used for money laundering and other criminal activities.

Due to alleged customer verification violations, Upbit reportedly faces fines of 100 million Korean won ($71,500) per case. However, the regulator shared that this case requires more attention to the fines’ size, given the large number of suspected cases.

Furthermore, the financial authorities’ decision is important as the outcome of this case could affect Upbit’s business license renewal.

Monopoly Probe Against Upbit

Upbit’s recent case comes a month after South Korea’s Financial Services Commission (FSC) announced plans to investigate the firm for potential anti-monopoly breaches.

The exchange’s market monopoly investigation was related to its relationship with online bank K-Bank, which local authorities have long scrutinized due to its high exposure to crypto exchanges. In November 2023, local reports revealed that about 70% of K-Bank’s deposits were linked to crypto.

The FSC then raised the issue that Upbit’s funds account for a significant portion of K-Bank’s deposits, posing a potential bank-run risk.