The South Korean Financial Intelligence Unit (FIU) ordered for a suspension of operation of Upbit, the country's largest crypto exchange, for violating the Anti-Money Laundering (AML) Policies.

The Financial Intelligence Unit has notified Upbit of the punishment, which would involve the banning of the exchange for six months, where it won't be able to provide services to new customers for the whole duration of the suspension.

This is also to protect existing users, so they won't be implicated by the ban. Upbit currently have till Monday to submit its response, and a final decision regarding the penalty will be given the following day.

Upbit's KYC violation investigation

The FIU alleged that Upbit has fallen short in meeting its (Know Your customer) obligation after it had identified at least 500,000 to 600,000 breaches in Upbit's clients identification process. This includes the discovery of many ID documents featuring blurred and unrecognizable pictures of customers.

These violations were first spotted while reviewing Upbit's business license renewal, which reportedly expired in October last year.

According to South Korea's Special Financial Transaction Act, the penalties for KYC violation can be up to 100 million Korean won ($68,600) per case.

Since Upbit was found to have at least 500,000 KYC breaches, the violation could cost the company up to $34.3 billion. Another Korean news agency also reported that Upbit has also violated the provision that prohibits local crypto companies from conducting transactions with unregistered crypto service providers.

In addition to KYC issues, the FIU expressed concerns regarding Upbit's service to overseas traders, which conflict with local regulations that restrict domestic exchanges to verified South Korean citizens.

According to local reports, other South Korean cryptocurrency exchanges are following FIU's future law enforcement actions against Upbit and are eager to understand the consequences.

Upbit was founded in 2017, and it is one of the largest crypto exchanges in South Korea and globally, trading $7.5 billion daily. The exchange has also dominated the local crypto market with around 70% of the market share.

Investigation into Upbit's relationship with K-Bank

Local news outlet Infomax reported that the Financial Services Commission (FSC) has also launched an investigation into Upbit, raising concerns about its relationship with online bank K-Bank.

During a parliamentary audit, South Korean lawmaker Lee Kang-il raised alarms about Upbit’s market dominance and its potential influence on K-Bank’s deposit structure, warning of a possible bank-run risk.

FSC Chairman Kim Byung-hwan acknowledged these concerns and confirmed that the regulator would investigate Upbit’s structure. The findings will be assessed in light of the Electronic Financial Transaction Act, which took effect on September 15.

Reports suggest that as of late 2023, up to 70% of K-Bank’s deposits were linked to cryptocurrency holdings, illustrating the close financial ties between the bank and Upbit. K-Bank, which has partnered with Upbit since at least 2021, recently filed for an initial public offering (IPO) in Seoul. The IPO could raise up to $732 million, marking the largest public listing in South Korea in nearly three years.