Introduction
In the wake of a significant blunder by Bithumb, which mistakenly distributed nearly $40 billion in Bitcoin due to an internal error, South Korea’s Financial Services Commission (FSC) has enacted new regulations for the country’s cryptocurrency exchanges.
New Regulations
By the end of May, all centralized trading platforms are required to implement a system that conducts five-minute balance reconciliations between their internal ledgers and actual assets held in wallets. This decision was prompted by findings that many of the major exchanges in South Korea were still relying on outdated 24-hour balance checks, potentially leaving users vulnerable to unnoticed deficits.
An FSC representative emphasized that the introduction of this rapid reconciliation system aims to facilitate swift responses to any discrepancies. The choice of a five-minute interval, according to officials, is based on the typical processing times within the systems and the expected load.
The Bithumb Incident
The regulatory changes arose after Bithumb inadvertently sent 2,000 bitcoins to each user instead of the intended 2,000 won cash reward during a promotional event, leading to a staggering estimated loss of 62 trillion won (approx. $39.9 billion). Following this incident, Bithumb admitted its failure in maintaining essential principles of stability and integrity in virtual asset trading.
The exchange promised to compensate affected customers and had taken steps to freeze the accounts of users who received the excess funds shortly after the misdistribution was identified. To address the panic selling that ensued, Bithumb pledged to restore full balances and offered a 110% reimbursement to those who sold during the ensuing chaos.
Automated Systems and Oversight
The FSC’s new requirements also mandate that exchanges employ automated systems to log reconciliations of client assets against both hot and cold wallet holdings. Notably, trading must be automatically suspended when there are significant discrepancies detected. This kill-switch mechanism aims to address a previous lack of formal circuit breakers in certain platforms that delayed responses during the Bithumb incident.
In addition to the automated checks, the FSC is enhancing external oversight by shifting from quarterly to monthly accounting audits. Exchanges now must report detailed information about the specific holdings in each wallet instead of a single asset coverage ratio. To further mitigate risks, distinctions must be made between high-risk accounts and manual payout accounts, incorporating third-party verifications and multi-layered authorization processes for significant transfers.
Conclusion
These reforms will be incorporated into a broader legislative agenda focusing on virtual assets, a continuation of regulatory efforts that have previously prioritized user safety amid concerns of exchange insolvencies and risks associated with trading fees and lending practices. Bithumb has expressed willingness to comply with the new rules and improve its systems with enhanced asset verification methods, a multi-step approval process for payments, and the establishment of AI systems to monitor for irregular transactions 24/7.
