Probe to focus on internal controls after misallocation of 620,000 bitcoins
South Korea's financial regulator has escalated its response to a large-scale misallocation of bitcoins at Bithumb, upgrading an initial on-site check to a full inspection.
The Financial Supervisory Service notified Bithumb on Monday of its decision to launch an inspection and began it the following day, according to financial authorities and industry sources Tuesday.
The escalation came three days after the watchdog began an on-site inspection Saturday, the day after the incident occurred.
The FSS said it will deploy additional inspection staff, citing the seriousness of the case. The inspection will focus on how Bithumb was able to allocate digital assets to customers in amounts far exceeding its actual holdings.
Bithumb, the country's second-largest crypto exchange, mistakenly credited 249 customers with about 620,000 bitcoins during a small rewards event on Friday evening, after an employee entered amounts in bitcoin rather than Korean won, inflating the allocation to roughly 60 trillion won ($41.2 billion) from an intended 620,000 won.
As of its latest disclosures, Bithumb held about 42,000 bitcoins in total, including 175 owned by the company with the remainder consisting of customer deposits. That figure is estimated to have risen to around 46,000 bitcoins since, but remains far less than the 620,000 bitcoins mistakenly allocated.
The FSS inspection is expected to examine how the digital assets were distributed to customers despite Bithumb not holding them in a sufficient quantity.
Centralized exchanges such as Bithumb rely on ledger-based systems in which balances are updated internally, or off-chain, and settled on-chain only when customers withdraw funds. The practice is legal provided exchanges maintain holdings that match the type and amount of assets recorded on their books.
Data from Rep. Lee In-young of the ruling Democratic Party of Korea showed that Bithumb conducts reconciliation of its internal ledger balance and the actual wallet holdings only once a day, leaving it comparatively more vulnerable than Upbit's reserve proving system that reconciles every five minutes.
South Korea's Virtual Asset User Protection Act requires virtual asset service providers to hold the same type and quantity of digital assets entrusted by users, and industry insiders say the incident may have breached that rule.
The case is expected to shape discussions on the second phase of the country's digital asset legislation, as regulators see the incident as exposing gaps in exchanges' internal controls.
"It laid bare fundamental weaknesses in the information systems of virtual asset exchanges," FSS Gov. Lee Chan-jin said at a press briefing Monday, adding that the institutionalization of the crypto market cannot advance unless such issues at exchanges are addressed.
Gov. Lee warned that unresolved system flaws could pose licensing risks for exchanges under the stricter regulatory framework authorities are seeking to introduce.
By Choi Ji-won (jwc@heraldcorp.com)
