South Korea’s FSC unveils no-nonsense regime in fallout from Bithumb’s $40B accident

Bithumb’s $40 billion payout error has pushed South Korea’s Financial Services Commission (FSC) to change existing regulations in order to prevent a repeat. 

All major exchanges are now required to make sure their ledgers and crypto balances are consistent every five minutes. These 5-minute reconciliation systems are expected to be fully built by the end of May.  

Bithumb faces punishment for Bitcoin accident

South Korea’s Financial Services Commission (FSC), in a meeting today with the “Big Five” exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, and the Digital Asset Exchange Alliance (DAXA), laid down the new laws created in response to the Bithumb disaster in February. 

Cryptopolitan previously reported that a Bithumb employee made a critical typo of 620,000 Bitcoins as a reward to 249 users instead of 620,000 won. The exchange ended up sending Bitcoin worth about $40 billion to customers, 13 times more Bitcoin than Bithumb even owned. 

So, now what happens to Bithumb? 

First, the commission confirmed that during its inspections into the February incident, “deficiencies in Bithumb’s internal control system” were found. The FSC is currently finishing a legal review to determine specific sanctions for this accident. 

Even before the February accident, Bithumb was in trouble. Last month, the Financial Intelligence Unit (FIU) hit Bithumb with a six-month partial business suspension, which will be effective from March 27 to September 26, and a 36.8 billion won ($24.6 million) fine after it was discovered that the company facilitated 45,772 transactions with unregistered overseas exchanges and failed to verify customer IDs properly. 

Can the FSC prevent another crypto accident?

In response to the Bithumb incident, the FSC has announced a total overhaul of monitoring systems, enforcing strict new rules going into effect immediately. 

Before the accident, three of the five major exchanges only checked their balances once every 24 hours. Now, every exchange must reconcile their books with their actual crypto wallets every five minutes. 

Under the new rules, if the system finds a massive mismatch during these 5-minute checks, it must automatically halt trading. Instead of quarterly checks, accounting firms must audit balances every month and report the quantity of assets held in each wallet. 

Going forward, the FSC instructed that high-risk transaction accounts must be separated. Any manual payout requires a “third-party cross-check,” meaning two people or systems must verify it. Depending on the amount, multi-level authorization might be necessary. 

The FSC admitted that the crypto industry’s self-regulation was weak, and so exchanges must now appoint a Risk Management Officer and form a Risk Management Committee. Inspections for violations will happen every six months instead of once a year, and results must be reported to the government. 

The FSC also recently proposed changing the existing rules in order to strengthen the registration of VASPs. For instance, the “Travel Rule”, which requires sharing sender or receiver info, used to only apply to transactions over 1 million won. But now, every single transaction, no matter how small, will be monitored to prevent money laundering. 

To get a license, VASPs must now keep a debt ratio below 200%, cannot have been in default for three years, and major shareholders must pass a strict credibility test. The FSC and DAXA plan to finalize these rule changes by the end of April.

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