South Korea opens investigation into Bithumb after $43B trading error

South Korea's financial regulator has initiated a comprehensive investigation into the local cryptocurrency exchange Bithumb following the erroneous transfer of over $43 billion in bitcoin to consumers last week.

On Tuesday, Yonhap news agency reported that the Financial Supervisory Service opted to elevate what was intended to be a regular examination into a comprehensive probe subsequent to last week's catastrophe.

An FSS official informed Yonhap that the agency is undertaking the investigation with the highest level of seriousness, stating that authorities will implement stringent measures against any actions that disrupt market order.

Authorities are apparently focusing their investigation on the manner in which Bithumb allocated a quantity of bitcoin that much above its actual holdings.

On February 6, the South Korean exchange inadvertently allocated 620,000 BTC ($43.1 billion) to several customer accounts during a promotional campaign giveaway. The error allegedly originated from a staff worker entering the reward unit as BTC rather than KRW (Korean won).

South Korea opens investigation into Bithumb

Bithumb has announced the recovery of 99.7% of the erroneously distributed bitcoin and 93% of the 1,788 BTC sold by consumers. Approximately 125 BTC remains inaccessible.

The exchange announced it will reimburse impacted consumers at 110% of their losses, as the incident resulted in an approximately 15% decline in the bitcoin-Korean won trading pair on its platform. Bithumb announced its intention to enhance its internal control system and establish a user protection fund of 100 billion won ($68 million) to assist users in unforeseen circumstances.

Bithumb acted promptly to retrieve funds and reimburse users; nonetheless, the exchange continues to encounter criticism due to the fat-finger incident revealing systemic flaws. The capacity to create and process transactions for substantial, fictitious bitcoin balances underscored significant deficiencies in its internal risk management. Despite the transfer of 620,000 BTC during the incident, Bithumb allegedly possessed merely 46,000 BTC at the time.

Local media reports

Local media reports pointed out that the Bithumb incident may adversely impact crypto's social standing in South Korea amid ongoing efforts to legislate the Digital Asset Basic Act, the country's second comprehensive crypto legal framework.

“This is no mere mishap,” wrote Na Kyung-won, lawmaker and member of the opposition People Power Party. “If an exchange operates by merely shifting numbers on an internal ledger without actual on-chain movements, it means they could be selling bitcoin they don't even own. This effectively sets the stage for a ‘bank run' and total market collapse.”

Choi Bo-yoon, the chief spokesperson for the People Power Party, said the operational competence of local digital asset exchanges has already reached a “failing grade.”

The ruling Democratic Party also weighed in, saying the incident exposed “critical loopholes” in internal control and ledger management systems of exchanges.

In the wake of the incident, the ruling party formally announced plans to impose a 15% to 20% cap on individual stakes in cryptocurrency exchanges. The proposal had previously received pushback from the industry, saying it would stifle growth.

The Bithumb fiasco has also reportedly prompted financial authorities and legislative bodies to discuss tougher measures that would impose legal responsibilities on crypto exchanges comparable to those faced by traditional financial institutions.