FSS Converts Probe into On-Site Investigation over Bithumb's Erroneous Bitcoin Payout Incident

The Financial Supervisory Service has converted its on-site inspection into a formal on-site investigation just three days after beginning an inspection into the erroneous Bitcoin payout incident at virtual asset exchange Bithumb.

According to the financial authorities on the 10th, the Financial Supervisory Service gave Bithumb prior notice of the commencement of an investigation the previous day and began a full-scale examination from this day. It also deployed additional personnel in charge of the inspection.

On the 6th, while paying out prize money for its own promotional event, Bithumb mistakenly entered the unit as "Bitcoin" instead of "won," resulting in an erroneous payment of 620,000 Bitcoins instead of 620,000 won.

The financial authorities are focusing on examining how an amount larger than the actual Bitcoin holdings of Bithumb was able to be paid out. As of the third quarter of last year, Bithumb held about 42,000 Bitcoins in total, of which 175 Bitcoins were the company’s own holdings and the remainder were customer-entrusted assets.

The reason Bithumb was able to pay out more than its actual holdings was its use of a book-entry transaction method. After customers deposited coins, Bithumb kept them in its own wallet and, whenever trades were executed, did not record each transaction directly on the blockchain but instead only changed the balance on its internal ledger.

The Financial Supervisory Service regards the circumstances under which 620,000 Bitcoins, far exceeding actual holdings, were paid out as a core subject of the investigation. It is also expected to examine the system vulnerability that allowed coin payouts with a single click by one staff member, as well as the system used to reconcile ledger balances with actual holdings.

The financial authorities plan to use the results of this investigation as a task for the second-stage legislative refinement on virtual assets. At a press briefing the previous day, Financial Supervisory Service Governor Lee Chanjin said, "If we do not properly resolve the ghost coin problem, how can the virtual asset market be incorporated into the institutional framework?" He added, "By reflecting the findings of this investigation, we have identified issues that must be strongly reinforced in the second-stage legislation."