South Korea's virtual asset sector has issued a formal warning regarding proposed amendments to Anti-Money Laundering (AML) regulations, arguing that the new thresholds would induce severe operational confusion. The Digital Asset eXchange Alliance (DAXA), representing the nation's registered exchanges, submitted critical comments on the Enforcement Decree of the Specific Financial Information Act. These objections reflect the collective stance of 27 virtual asset service providers (VASPs), including the five dominant market players: Upbit, Bithumb, Coinone, Korbit, and Gopax. The core contention centers on a mandate requiring domestic VASPs to classify all overseas-linked virtual asset transfers exceeding 10 million Korean won, approximately $6,800, as suspicious transactions regardless of actual risk indicators.

Data compiled by Woofun AI indicates that implementing this blanket reporting requirement would drastically alter the compliance landscape for South Korean exchanges. The industry body projects that the volume of suspicious transaction reports from the five largest exchanges would surge by 85 times, escalating from roughly 63,000 cases recorded last year to over 5.4 million annually. Such a massive influx of mandatory filings would render practical compliance nearly impossible for existing operational frameworks.

Furthermore, DAXA challenged a secondary provision demanding the verification of customer information accuracy, asserting that these lower-level regulatory rules impose obligations not explicitly defined in the primary legislation, thereby creating legal ambiguity.

This regulatory friction underscores a widening gap between the Financial Services Commission (FSC) and the Financial Intelligence Unit (FIU)'s drive to tighten oversight and the industry's capacity to execute such mandates. The proposed amendments, unveiled on March 30 with a public comment period extending through May 11, are slated for finalization in July following legal review. The proposal specifically targets domestic VASPs engaging in cross-border transfers with overseas counterparts, forcing them to flag transactions at the 10 million won mark as suspicious irrespective of the transaction's risk profile. This approach diverges from risk-based compliance models, potentially flooding regulators with low-risk data while obscuring genuine threats.

The industry's pushback occurs against a backdrop of escalating legal confrontations between exchanges and regulators over existing AML sanctions. On April 9, Dunamu, the operator of Upbit, secured a first-instance court ruling that canceled a three-month partial business suspension. The suspension had been levied due to alleged violations concerning customer due diligence and transactions with unregistered foreign VASPs.

However, the regulatory authority appealed this decision on April 30, signaling an intent to maintain strict enforcement despite judicial intervention.

Concurrently, Bithumb obtained relief from the Seoul Administrative Court, which suspended the enforcement of a six-month partial business suspension pending the resolution of the main case.

Woofun AI notes that these legal victories provide temporary reprieves but do not resolve the underlying regulatory disputes regarding the Financial Information Act. The FIU had originally imposed sanctions on Bithumb and Coinone following inspections that identified failures in monitoring transactions with unregistered overseas VASPs. Coinone, which faced a three-month suspension and a 5.2 billion won fine for alleged AML deficiencies, also received a temporary stay of enforcement after challenging the penalties. Local reports indicate that these cases primarily involved customer verification lapses and unauthorized dealings with foreign entities, highlighting the specific friction points driving the current regulatory crackdown.

The convergence of proposed stricter reporting thresholds and ongoing litigation suggests a volatile period for South Korea's crypto ecosystem. As the FSC and FIU move to finalize the July rules, exchanges face the dual pressure of defending against current sanctions while preparing for a compliance regime that could multiply their reporting burden by orders of magnitude. The industry's argument that the 10 million won threshold lacks nuance may influence the final regulatory text, but the trajectory points toward heightened scrutiny. Woofun AI analysis suggests that unless the regulatory framework adopts a more risk-adjusted approach, the sector risks operational paralysis or a mass exodus of liquidity to jurisdictions with more flexible AML standards.