South Korea steps up crypto monitoring regime with new tools, specialists

South Korea’s Financial Security Institute (FSI) has announced that it will develop smart contract auditing tools that work autonomously and train digital asset security specialists.

The Financial Security Institute’s announcement follows a separate $2.2 million AI transaction-tracking system launched in South Korea by the National Tax Service just days before.

Why is South Korea building smart contract tools?

Stolen crypto is almost impossible to recover, and Korea has learned this lesson the hard way. South Korea’s Financial Security Institute (FSI) announced that it will build automated smart contract auditing tools following a long list of embarrassing security failures by Korean authorities.

For instance, Cryptopolitan reported in February that the NTS itself accidentally published an unredacted wallet recovery phrase in a press release, leading to the theft of roughly $4.8 million in crypto tokens within hours.

Cryptopolitan also reported when Seoul’s Gangnam Police Station lost 22 Bitcoins worth over $1.4 million from a cold wallet that had been in custody since 2021. The disappearance was only discovered when 320.8 Bitcoins worth over $21 million was lost to a phishing attack at the Gwangju District Prosecutors’ Office.

The FSI, led by director Park Sang-won, now plans to build software that automatically detects vulnerabilities in smart contracts used by tokenized securities and stablecoins. 

The FSI will also publish a “Smart Contract Security Guide” for financial companies and train security specialists across the Korean financial sector.

Beyond the FSI, South Korea’s Financial Services Commission (FSC), after Bithumb’s February payout error, where an employee mistakenly sent Bitcoin worth roughly $40 billion to customers instead of Korean won, mandated that all major exchanges reconcile internal ledgers with actual crypto holdings every five minutes.

Exchanges must now halt trading automatically when mismatches are detected, appoint a Risk Management Officer, and submit to inspections every six months rather than annually.

Can AI tools catch crypto tax evaders?

Days before the Financial Security Institute’s announcement, South Korea’s National Tax Service started building an AI surveillance system at the Seoul Regional Tax Office with a budget of roughly $2.2 million.

Cryptopolitan reported that the system will pull transaction records from exchanges like Upbit and Bithumb and combine them with on-chain blockchain data. The AI will then flag suspicious patterns, including money laundering, unreported gifts, and offshore tax evasion. The system will also track non-custodial wallets.

The plan is to track all the routes South Korean traders use to hold and trade the digital assets they own. Ministry of Economy and Finance confirmed earlier this month that a 22% tax on crypto gains will take effect in January next year. The tax applies to annual gains exceeding 2.5 million won (roughly $1,800). Moon Kyung-ho, director of the ministry’s income tax department, said final tax guidelines will be ready by the end of 2026.

Meanwhile, data submitted by Upbit, Bithumb, Coinone, Korbit, and Gopax to lawmaker Ahn Do-geol, shows that the total value of crypto assets held by over 10 million South Korean investors on those exchanges dropped by 37.5% to roughly $51.02 billion.