South Korea Weighs Freezing Crypto Accounts, Rewards for Reporting Market Abuse

South Korea’s financial authorities are considering a system to freeze accounts tied to unfair trading in virtual assets and to reward people who report such activity, as they seek to prevent the concealment of illicit gains.

On July 20, the Financial Services Commission and the Financial Supervisory Service released the results of unfair-trading investigations conducted over the past two years and outlined next steps as the Virtual Asset User Protection Act marked its second anniversary.

The authorities have completed investigations into more than 40 unfair-trading cases since the law took effect on July 19, 2024. More than 30 of those cases were referred or reported to investigative agencies. A total of 25 suspects were identified.

Most of the cases involved market manipulation. The authorities identified ultra-short-term schemes such as so-called racehorse trades, in which orders are concentrated during a specific period to push a token into the ranks of top gainers and lure in buyers, and caging schemes, in which prices are artificially inflated by exploiting suspensions of deposits and withdrawals for a specific virtual asset.

They also uncovered cases in which traders borrowed API keys to manipulate prices over a short period. In other cases, so-called whales linked to token-issuing foundations mobilized large sums and used overseas exchanges to intervene in prices.

In one fraudulent trading case, people involved in issuing a memecoin bought the token in advance, posted false information on social media to induce investor buying, and then sold all of their holdings, pocketing illicit gains worth several hundred million won. The authorities also found cases that exploited the price-linkage structure between Tether and Bitcoin markets on local exchanges.

Average illicit gains per case were 1.4 billion won, the authorities said. Eight cases involved illicit gains of 500 million won to 5 billion won, a range subject to tougher criminal penalties, while one case involved more than 5 billion won. The number of virtual assets tied to each case averaged eight.

To recover unlawful profits, the authorities imposed surcharges in two cases — one involving fraudulent trading and one involving market manipulation — at 125% to 165% of the illicit gains.

They also strengthened market surveillance and investigations, building a real-time market monitoring system and an artificial intelligence-based surveillance and investigation framework with second-by-second manipulation analysis and automated detection of suspicious groups and trading periods. Crypto exchanges are also operating round-the-clock monitoring systems for unusual trading and have stepped up preventive measures, including restricting orders tied to repeated suspicious activity.

The authorities plan to expand enforcement tools for unfair trading in virtual assets. They will review adding to the second phase of South Korea’s Digital Asset Act an account-freeze system modeled on the capital-markets regime to prevent the concealment of illegal profits, as well as a reporting and reward program aimed at detecting misconduct at an early stage.

The authorities said they would use all available resources to establish a fair and transparent market order that users can trust as digital-asset market abuse becomes increasingly sophisticated, larger in scale and more complex.