South Korean regulators announced an inspection of local crypto exchanges and enhanced measures to address regulatory “blind spots” following Bithumb’s $40 billion Bitcoin (BTC) payment error.
A new working group to examine crypto exchange practices
South Korean financial authorities on Monday announced they will step up efforts to regulate the crypto sector and foster a reliable business environment for digital assets, local media reported.
Following the “ghost Bitcoin” incident at Bithumb, South Korea’s second-largest cryptocurrency exchange, Financial Supervisory Service (FSS) Governor Lee Chan-jin revealed an inspection of local exchanges and highlighted the need for improved legislation.
As reported by Bitcoinist, Bithumb accidentally distributed 620,000 Bitcoins, worth over $40 billion, to 249 users participating in the exchange’s “random box” promotional event due to an employee error.
Although 99% of the BTC was recovered, the incident raised serious concerns about the crypto exchange’s internal controls. Notably, Bithumb held 175 BTC on its own books and less than 50,000 Bitcoins between its own assets and assets held by its customers, according to a regulatory filing from last year.
This means that the exchange system failed to block the irregular transaction, distributing assets to users that did not actually exist and distorting market prices.
“The so-called Phantom Bitcoin incident clearly revealed that beyond a simple input error, there are structural weaknesses in the internal controls and ledger management systems of cryptocurrency exchanges,” Kim Jiho, a spokesperson for the ruling Democratic Party, said during a press briefing on Saturday.
At the same time, the FSS governor claimed that “the incident clearly revealed the structural flaws of virtual asset trading systems,” adding: “Many aspects of the case we consider extremely serious.”
As a result, the FSS, alongside the Korean Financial Intelligence Unit (KoFIU), Financial Supervisory Service (FSS), and Digital Asset eXchange Alliance (DAXA), formed an emergency task force to organize follow-up measures and review industry-wide practices.
Reports indicate that the task force plans to examine Bithumb and other domestic exchanges’ virtual asset reserves, management practices, operational conditions and internal control systems.
“We will conduct planned investigations into key high-risk areas of the virtual asset market where unfair trading practices, such as market manipulation and the spread of false information, are of concern,” Lee said.
Regulators must address “structural vulnerabilities”
The FSS governor also warned that the process could lead to a thorough investigation if illegal activities were revealed, adding that the incident would be reflected in the long-awaited second phase of the law on the protection of users of virtual assets, which should serve as a comprehensive framework for the entire sector.
“As we develop the second phase of virtual asset legislation, measures to address the structural vulnerabilities of exchanges, exposed by the recent Bithumb incident, will be considered,” Lee said.
“As virtual assets are integrated into the existing financial system, there is still a need to strengthen the regulatory and supervisory framework. This could be an opportunity to get the system in place properly,” he continued.
It is worth noting that South Korean financial authorities are reportedly considering introducing a system to prevent suspects from hiding or withdrawing unrealized profits resulting from market manipulation related to crypto assets.
The Financial Services Commission (FSC) revealed last month that it is studying proposed prosecution measures against suspects of crypto asset price manipulation, as some officials believe it is necessary to “supplement the current law on the protection of users of virtual assets by implementing measures to confiscate proceeds of crime or preserve recovery funds in advance.”
The measure would limit fund outflows, such as withdrawals, transfers and payments from a crypto-related account suspected of obtaining illicit gains through typical market manipulation tactics.
Bitcoin trades at $69,010 in the one-week chart. Source: BTCUSDT on TradingView
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