Upbit, the largest cryptocurrency exchange in South Korea and sixth globally by trading volume, is facing a potential suspension order from the Financial Intelligence Unit (FIU) due to alleged violations of anti-money laundering (AML) and Know Your Customer (KYC) regulations.

The FIU's scrutiny follows a review of Upbit's business license, which was renewed in October 2024, and is currently under regulatory examination.

During this suspension period, new customers would also be restricted from transferring virtual assets outside the exchange.

Upbit's operations are closely linked to K-Bank, with customer funds making up about 20% of the bank's deposits, raising fears of a bank run if Upbit's operations are disrupted.

FSC Chairman Kim Byung-hwan has emphasized the need for fair competition and oversight of Upbit's market dominance, particularly in relation to its partnership with K Bank.

Concerns have been amplified by Upbit's significant deposits with K Bank, totaling approximately 4 trillion won (around $2.74 billion), which could impact the bank's stability.

In response to these issues, the Financial Services Commission (FSC) is drafting new legislation aimed at enhancing the regulatory framework for cryptocurrencies, focusing on investor protection and clarity.

If the suspension is enacted, Upbit would be barred from engaging with new customers for up to six months, although existing users would still be able to trade.

Reports indicate that the suspension stems from Upbit's failure to comply with KYC obligations, with investigations revealing between 500,000 to 600,000 breaches in customer identification processing.

These KYC violations were initially reported by South Korean authorities in November 2024, highlighting significant concerns about Upbit's compliance measures.

These developments underscore the South Korean authorities' commitment to enforcing stricter regulations following the introduction of the Virtual Asset User Protection Act in July 2024.

Upbit has until January 20, 2025, to respond to the suspension notice, with the FIU expected to make a final decision shortly thereafter.