Even Losing 13 Billion Instantly Due to Server Explosion... The Harsh Reality of Cryptocurrency Revealed in Court

Court: "Exchange Not Liable for Compensation"
Legal and Regulatory Blind Spots Lead to Partial Losses
Investors Bear the Full Brunt

"At Least a Basic System Must Be Established"

[Asia Economy Reporters Seongpil Cho, Daehyun Kim] Cryptocurrency investor Mr. A had 100 BTC (Bitcoin units) stolen within about 30 minutes while trading Bitcoin on an exchange. An unknown hacker hacked his ID and password. The damage was significant. At the time, the amount was equivalent to 52 million KRW at market value. Mr. A filed a lawsuit in court demanding the exchange compensate 52 million KRW, arguing that the accident occurred due to the exchange's negligence in managing personal information and that they were responsible for damages. After about two years, the lawsuit concluded with Mr. A losing the case.

Investors aiming for a quick profit with cryptocurrency continue to lose money due to security and IT incidents and file lawsuits against exchanges. Recently, as investment has become more active, the scale of lawsuits has also grown. Bithumb Korea, which operates Bithumb, the largest cryptocurrency exchange in Korea, disclosed that as of the end of last year, the amount of damages claims pending against the company as defendant reached a staggering 9 billion KRW. This is four times the 2.4 billion KRW recorded at the end of 2017, when the first cryptocurrency investment boom occurred. A representative from a major law firm said, "As investment activity in cryptocurrency is active, not only lawsuits but also related advisory demands have increased," adding, "Lawsuits and related demands will continue to rise."

◆ Legal Loopholes... Most Investors Lose = According to Asia Economy's comprehensive reporting, the results of lawsuits filed due to security and IT incidents have mostly been unfavorable. Many cases involve investors who lost both money and mental health due to an unexpected accident while chasing quick riches. Investor Mr. B experienced this. Just as he was about to sell a cryptocurrency that surged 150% in price in one day, the exchange's server crashed, causing him to miss the selling opportunity. The server could not handle the surge in orders from other investors. Although the server was restored after 1 hour and 30 minutes, the price of the cryptocurrency Mr. B wanted to sell had already plummeted. Mr. B and about 600 other investors filed a damages lawsuit worth approximately 13 billion KRW based on the price difference. However, the court dismissed the claim, stating, "There is no evidence of intentional or negligent fault on the part of the exchange."

The reason for such rulings lies mainly in the current situation where there are no laws or regulations governing the operation of cryptocurrency exchanges. Banks are regulated under the Banking Act, insurance companies under the Insurance Business Act, and securities firms under the Capital Markets Act, which impose regulations on system construction and limit settings. In contrast, cryptocurrency exchanges lack such legal protection. Even if investors suffer losses due to IT errors or hacking, courts do not recognize fault on the part of the exchanges.

◆ Even Winning Lawyers Say "Legislation Needed" = The case of cryptocurrency investor Mr. C, who was fully recognized for the exchange's fault, is considered exceptional in the legal community. In 2018, Mr. C requested a withdrawal of his Bitcoin from an existing exchange to send it to a new exchange. However, the Bitcoin was withdrawn to an unknown address that he did not recognize, causing him to lose about 90 million KRW instantly. After conflicts over the responsibility for this erroneous withdrawal, Mr. C eventually took the case to court. The court ruled, "The exchange has a duty of care to prevent withdrawals to addresses different from those requested by investors," and ruled in favor of Mr. C.

Attorney Giwon Seo of Dongin Law Firm, who led the victory, said, "This is the first ruling recognizing the exchange's responsibility for an accident occurring during the cryptocurrency withdrawal process." Separately, Attorney Seo emphasized, "Most citizens face a regulatory blind spot where exchanges avoid responsibility even when lawsuits are filed," adding, "Legislation should be enacted so that citizens can trust and trade cryptocurrency, requiring exchanges to establish minimum security systems and regulate accident handling and customer response." He also offered advice to investors who suffered losses due to accidents. He said, "Exchanges often try to avoid responsibility by claiming that 'someone intercepted electronic information during the transfer to another site and hacked it.' It is important to preserve evidence and then seek methods with lawyers and experts."