Korea Cracks Down on Illicit Crypto Transfers with Proposed Account Freezing Law

South Korea's ruling Democratic Party has proposed an amendment to the Act on Reporting and Use of Certain Financial Transaction Information, which would grant financial authorities the power to freeze cryptocurrency exchange accounts suspected of being used for illicit asset transfers.

The proposed changes introduce a new legal definition of an 'account' within the context of virtual asset service providers (VASPs), expanding the scope to include unique identifiers assigned by crypto exchanges. This move brings cryptocurrency exchange accounts explicitly under the purview of existing financial transaction reporting laws, closing a previous regulatory gap.

The amendment also empowers the Financial Intelligence Unit (FIU) to request payment suspensions from both financial institutions and virtual asset service providers if it determines there are reasonable grounds to suspect that bank accounts or digital asset accounts have been used to transfer illicit assets. This direct intervention mechanism represents a significant expansion of the country's anti-money laundering framework for digital assets.

The proposed bill would introduce new compliance obligations for cryptocurrency exchanges operating in South Korea, requiring them to comply with FIU requests to suspend transactions from flagged accounts. For users, the amendment signals a tightening of oversight, raising questions about due process and the potential for administrative errors.