Scale of Reports, Hwanchigi Schemes, and Drivers
South Korea’s Financial Intelligence Unit (FIU) has reported a significant escalation in flagged cryptocurrency activity, with 36,684 Suspicious Transaction Reports (STRs) filed in the first eight months of 2025. This figure surpasses the combined total for the entire years of 2023 and 2024, indicating a sharp increase from the 199 cases recorded in 2021. STRs are a core anti-money laundering tool, mandated by law for financial institutions and virtual asset service providers (VASPs) to file when they suspect transactions involve criminal proceeds.
The data reveals that a majority of these flagged transactions are linked to illegal foreign exchange remittance schemes known as “hwanchigi”. In these schemes, illicit funds are converted into cryptocurrency often stablecoins like Tether (USDT) using offshore platforms, then routed into domestic South Korean exchanges to be cashed out into won, bypassing foreign exchange banks. The Korea Customs Service (KCS) has referred approximately $7.1 billion in crypto-linked crimes to prosecutors since 2021, with a staggering 90% ($6.4 billion) connected to these hwanchigi operations. This surge is driving lawmakers, such as Representative Jin Sung-joon, to call for systematic countermeasures and stronger enforcement to track criminal funds and block disguised remittances.
Regulatory Response and Market Impact
The dramatic increase in STRs is accelerating regulatory scrutiny and is likely to lead to stricter oversight. The government is being urged to establish more robust countermeasures against the misuse of cryptocurrencies for foreign exchange crimes. This could include real-time monitoring requirements, stronger penalties for non-compliance, and specific laws targeting illegal crypto-based remittances. The focus is also on stablecoins, whose growing use in payments and settlements increases their potential for abuse in such schemes.
For market participants, this heightened regulatory focus has direct implications. Exchanges and custodians will likely face increased compliance costs as they adapt their systems and reporting workflows to meet tighter standards. Furthermore, as authorities crack down on the conduits used in hwanchigi, there is a potential for increased liquidity and counterparty risk. Bottlenecks in converting between stablecoins and fiat could emerge, potentially affecting market depth and settlement reliability for traders and institutional treasuries.
The response may also follow international trends, such as the European Union’s MiCA regulation, which aims to harmonize standards and prevent regulatory arbitrage by requiring transparency and licensing for issuers. The key milestone for the market will be the design and timing of South Korea’s new measures, which will determine whether the regulatory response successfully curbs abuse without harming the underlying market infrastructure.
