South Korea Tightens Grip on Crypto Markets Ahead of Institutional Influx

In a decisive move to fortify its burgeoning digital asset sector, South Korea is ushering in a sweeping regulatory overhaul through the Virtual Asset User Protection Act, set to take effect on June 1, 2025. This landmark legislation aims to strike a balance between fostering innovation and ensuring safety across the virtual asset ecosystem, introducing stringent anti–money laundering (AML) measures and enhanced know-your-customer (KYC) protocols. Under the Act, non-profit organizations and licensed exchanges will be authorized to conduct limited cryptocurrency sales, providing a testbed for broader institutional participation anticipated later in the year.

The scale of South Korea’s crypto boom underscores the urgency of these reforms. According to the Financial Intelligence Unit (KoFIU), total market capitalization surged to ₩107.7 trillion in the second half of 2024, reflecting a 91 percent increase over the period. Daily trading volumes jumped 22 percent to ₩7.3 trillion, while user engagement soared by 25 percent, with the number of eligible registered users rising from 7.78 million to 9.70 million. These metrics, coupled with expanding profits and deposits, signal a maturing market demanding vigilant oversight.

The Virtual Asset User Protection Act lays down foundational requirements for virtual asset service providers (VASPs) and their affiliated banking institutions. Beginning in June, non-profits will be permitted to liquidate crypto donations, subject to rigorous source-of-funds verification. Similarly, registered exchanges will be allowed to convert user fees paid in cryptocurrencies into fiat, contingent on a comprehensive review of the transaction’s purpose. A core requirement of the framework is that exchanges and their banking partners must implement robust KYC procedures for all new institutional clients. This entails verifying the origin of funds, examining transaction intents, and conducting continuous monitoring of both institutions and their executives to mitigate laundering risks. In aligning with the Financial Action Task Force’s global standards and the nation’s Act on Reporting and Using Specified Financial Transaction Information, the South Korean government is signaling a zero-tolerance stance on illicit finance without curbing sectoral growth.

Backing the legislative drive are compelling findings from KoFIU’s survey of 25 registered VASPs, conducted over the period from July 1 to December 31, 2024. The data paints a vivid picture of market vitality: total operating profits increased 28 percent, from ₩581.3 billion to ₩741.5 billion, while total deposits more than doubled—leaping 114 percent from ₩5.0 trillion to ₩10.7 trillion. “The price increase in virtual assets and expansion of market size observed from the second half of 2023 in the domestic virtual asset market accelerated in the second half of 2024,” KoFIU reported, emphasizing the market’s swift evolution.

However, the expansion has not been universal. Coin-only exchanges witnessed an 81 percent plunge in daily volumes and a 19 percent drop in market capitalization, largely due to consolidation among KRW-based operators. Meanwhile, the travel rule saw only a modest 4 percent rise in external transfers, although transactions to whitelisted overseas entities and personal wallets climbed 38 percent. Custody, wallet, and staking services faced steep declines—assets under custody tumbled 89 percent, and user numbers plummeted 99 percent—following the closure of several businesses.

With institutional investment slated to resume in the latter half of 2025, regulators are treating this phased rollout as a systemic stress test. The limited crypto sales permitted for non-profits and exchanges will yield critical data on transaction flows and compliance hurdles. In the third quarter of the year, the Financial Services Commission (FSC) will release new guidelines, allowing publicly listed firms and professional investors to trade digital assets using “real-name” accounts, underpinned by stringent AML and KYC protocols. This graduated strategy enables regulators to adapt policies based on real-world compliance patterns, laundering red flags, and operational bottlenecks, while also fostering greater market trust. Transparent, well-enforced rules are expected to attract compliant institutional capital, solidifying South Korea’s status as a leading crypto market.

To meet the demands of the new regulatory environment, exchanges and banks are being urged to adopt a proactive stance. Best practices include implementing layered KYC frameworks that feature enhanced due diligence for institutional clients, such as source-of-wealth attestations and documented transaction purposes. Automated monitoring systems should be deployed to detect irregular activity—such as rapid, repetitive transactions involving high-risk jurisdictions or amounts just below reporting thresholds—augmented by manual reviews. Routine AML training for staff is essential to help them identify complex laundering typologies, including trade-based methods and the use of mixers. Firms are also advised to conduct periodic, independent audits of their compliance systems, simulating due-diligence procedures and stress-testing transaction monitoring tools. Establishing open communication lines with the FSC and KoFIU is likewise critical, both for clarifying regulatory expectations and sharing emerging best practices. These steps not only fulfill legal obligations but also enhance reputational capital—an invaluable asset in today’s competitive global crypto marketplace.

Looking ahead, several regulatory and market trends are expected to shape South Korea’s digital asset landscape. RegTech adoption is poised to accelerate, with AI-powered tools becoming indispensable for real-time AML detection and KYC streamlining. South Korea is also intensifying cross-border cooperation, working with international counterparts to standardize travel-rule enforcement and bolster information sharing. Regulators may soon introduce token classification systems to distinguish between utility and security tokens, a shift that will have broad implications for listing requirements and investor protections. At the retail level, public awareness campaigns will aim to better educate consumers on the risks of crypto trading and self-custody.

South Korea’s introduction of the Virtual Asset User Protection Act and its layered AML/KYC mandates mark a pivotal step toward building a secure, sustainable digital asset ecosystem. With insights drawn from the KoFIU’s H2 2024 survey—which highlighted surging capitalization, increased trading volumes, and expanding user bases—regulators are carefully balancing the push for institutional access with safeguards against illicit activity. As non-profits and exchanges initiate limited crypto sales this June, the groundwork is being laid for broader institutional entry later in the year, driven by rigorous compliance, real-time data analysis, and adaptive oversight.

By fLEXI tEAM