Probe to focus on internal controls after misallocation of 620,000 bitcoins
South Korea’s financial regulator is intensifying its investigation into a significant bitcoin misallocation at Bithumb, escalating an initial on-site review to a full-scale inspection.
The Financial Supervisory Service (FSS) formally notified Bithumb of its decision to conduct a thorough inspection on Monday and commenced the process the following day, according to sources within financial authorities and the crypto industry on Tuesday.
This escalation occurred just three days after the FSS initiated an on-site check on Saturday, the day after the incident unfolded.
The FSS stated it would deploy additional personnel to conduct the inspection, emphasizing the seriousness of the matter. The primary focus will be to determine how Bithumb managed to allocate digital assets to customers in quantities that significantly exceeded its actual holdings.
Bithumb, the second-largest cryptocurrency exchange in South Korea, mistakenly credited approximately 249 customers with around 620,000 bitcoins during a promotional event on Friday evening. This error occurred when an employee incorrectly entered amounts in bitcoin instead of Korean won, inflating the allocation to roughly 60 trillion won ($41.2 billion) from the intended 620,000 won.
According to its most recent disclosures, Bithumb possessed approximately 42,000 bitcoins in total. This included 175 bitcoins owned by the company and the remainder consisting of customer deposits. While estimates suggest this figure has since risen to around 46,000 bitcoins, it remains significantly lower than the 620,000 bitcoins that were mistakenly allocated.
The FSS inspection aims to investigate how these digital assets were distributed to customers despite Bithumb lacking sufficient reserves.
Centralized exchanges like Bithumb operate using ledger-based systems where balances are updated internally (“off-chain”) and settled on the blockchain (“on-chain”) only when customers withdraw funds. This practice is permitted as long as exchanges maintain holdings that accurately reflect the type and quantity of assets recorded in their internal records.
Data provided by Rep. Lee In-young of the Democratic Party of Korea revealed that Bithumb reconciles its internal ledger balance with actual wallet holdings only once per day. This makes it comparatively more vulnerable compared to Upbit’s reserve proving system, which performs reconciliation every five minutes.
South Korea’s Virtual Asset User Protection Act mandates that virtual asset service providers hold the same type and quantity of digital assets as entrusted by their users. Industry insiders suggest this incident may represent a violation of that regulation.
This case is anticipated to influence discussions during the second phase of South Korea’s digital asset legislation, as regulators view the incident as exposing weaknesses in the internal controls of cryptocurrency exchanges.
“It revealed fundamental weaknesses in the information systems of virtual asset exchanges,” stated FSS Gov. Lee Chan-jin during a press briefing on Monday. He added that the institutionalization of the crypto market cannot progress until these issues are addressed.
Gov. Lee cautioned that these unresolved system flaws could jeopardize the licensing prospects of exchanges under the stricter regulatory framework that authorities are planning to implement.
jwc
