[Cryptocurrency Exchanges in Crisis]② Declining Performance Shakes Trust... Will Investor Exodus Continue?

‘Bribery for Listing’ Plagues Exchange… Hacking Incidents Fuel Distrust
“Unethical Conduct of Exchange Management Is the Issue”

Noise surrounding virtual asset exchanges continues unabated. Trust is being shaken as former executives of exchanges who pocketed bribes during the coin listing process are being prosecuted. As distrust in exchanges grows, the likelihood of investors withdrawing inevitably increases.

Coinone and Bithumb Hit by Bribed Listings

According to industry sources on the 27th, Jeon Mo, a former director of the domestic virtual asset exchange Coinone, who is accused of breach of trust and bribery, has been indicted in custody. He is suspected of receiving 2 billion KRW in listing fees (listing commissions) from brokers in exchange for listings while serving as the director in charge of listings at Coinone for about 2 years and 8 months. Go Mo, a listing broker who allegedly delivered money to Jeon, was also indicted in custody. It is known that the number of virtual assets involved in the listings exceeds 29.

Coinone suffered not only from bribed listings but also from the P Coin, which triggered the Gangnam kidnapping and murder case. P Coin is a virtual asset exclusively listed on Coinone, and the suspect in the case, Lee Mo, committed the crime after suffering losses from investing in P Coin.

Coinone has launched a full investigation into virtual assets related to the bribed listing case and plans to take legal action such as claiming damages for losses caused by illegal activities. Regarding P Coin, Coinone announced plans to terminate trading support. Coinone stated, "We confirmed that no contractual relationship was established with the specific promotional target mentioned in multiple media reports," and added, "We confirmed that an unauthorized promotional banner was inserted on the foundation's homepage, providing incorrect information to investors."

Bithumb, the second-largest domestic exchange by market share, was also hit by a similar incident. The Seoul Southern District Prosecutors' Office is investigating a Bithumb Holdings executive suspected of accepting bribes in exchange for coin listings. The executive is accused of receiving money from Kang Jong-hyun, who is suspected to be the real owner of Bithumb, in exchange for listing a specific coin.

National Assembly’s Political Affairs Committee Passes Virtual Asset Act Including Investor Protection

In response to such behavior, the National Assembly’s Political Affairs Committee passed a bill focused on investor protection for virtual asset exchanges. The bill consolidates and coordinates 19 previously proposed virtual asset-related bills. It defines the use of undisclosed material information, market manipulation, and unfair trading practices as unfair trading acts. Violations are subject to criminal penalties, liability for damages, and class-action lawsuits. The Financial Services Commission is authorized to impose fines. Penalties include imprisonment for more than one year or fines ranging from three to five times the profits gained or losses avoided by the violation, and fines are set at twice the profits.

National Assembly Political Affairs Committee Plenary Meeting. Photo by Yonhap News

Additionally, virtual asset service providers are required to ▲deposit and trust customer deposits ▲store customer virtual assets in the same type and quantity ▲subscribe to insurance or mutual aid or accumulate reserves to prepare for hacking or system failures ▲generate and store virtual asset transaction records. They are also restricted from trading their self-issued virtual assets and cannot block deposits or withdrawals without justifiable reasons. They must monitor for abnormal transactions and take appropriate measures.

Experts emphasize the need for strict punishment for individual misconduct. Hong Ki-hoon, a professor of business administration at Hongik University, said, "Ultimately, the unethical behavior of exchange operators is the problem," adding, "Just showing awareness that such behavior is wrong and the will to punish it will greatly improve the current situation." He expressed concern, saying, "In the short term, investors may not immediately withdraw because there is no alternative to the current exchanges, but trust is important, so in the long term, they might." He also added, "Allowing securities firms and others to become alternatives to current exchanges could be a way to prevent investor withdrawal."

Gdac Hacking Incident Causes Virtual Asset Losses Worth Approximately 20 Billion KRW

Furthermore, the hacking incident at the domestic exchange Gdac is cited as a factor increasing distrust. On the 9th of this month, about 20 billion KRW worth of virtual assets, approximately 23% of Gdac’s total held assets including Bitcoin, Ethereum, and WEMIX, were lost due to hacking. The Financial Intelligence Unit (FIU) under the Financial Services Commission conducted a comprehensive inspection of Gdac and requested an increase in the proportion of cold wallets, which reportedly helped reduce the damage. The hacking occurred in the hot wallet, which is an online-connected virtual asset wallet with relatively lower security. Cold wallets refer to offline wallets with higher security. The government recommends virtual asset exchanges store more than 70% of assets in cold wallets.

Gdac stated in a notice, "All assets currently held by members at Gdac are fully covered and compensated." It added, "All executives and employees deeply reflect on the fact that trust is built over a long period but can collapse in an instant, and that rebuilding lost trust requires a process several times more demanding."