Adds governor's comment in paragraph 5, context in paragraphs 6-7, analyst comment in paragraph 8

By Jihoon Lee

SEOUL, Feb 9 (Reuters) - South Korea's financial market watchdog said on Monday local exchange Bithumb's unintentional giveaway of more than $40 billion in bitcoin to customers raises the need for tougher regulations to address the vulnerabilities of cryptocurrencies.

The cryptocurrency exchange said on Saturday it had accidentally given away the bitcoin to customers as promotional rewards, triggering a sharp selloff on the exchange.

Lee Chan-jin, governor of the Financial Supervisory Service $(FSS)$, told a press conference that there was a need for improved regulatory mechanisms to address such risks, adding that authorities will seriously consider the problems revealed by the incident as they seek to bring digital assets under regulatory control with legislation.

"It is a case that shows the structural problems of electronic systems for virtual assets. There are many areas we are seriously looking into, and we are particularly worried about the issue of electronic systems," Lee said.

"There are tasks to significantly improve the regulatory system, as virtual assets are in the process of being brought into the legacy financial system," Lee said.

South Korea introduced the Virtual Asset User Protection Act in July 2024 to better protect crypto investors following a market rout in 2022 triggered by the collapse of cryptocurrencies terraUSD and luna.

The government aims to introduce another bill further widening regulatory control over digital assets, while discussions are also ongoing among policymakers and lawmakers over won-denominated stablecoins.

"It is regrettable such an incident happened at a time when there were moves by financial firms to foster the industry, such as M&A deals, on expectations of more policy support, which will now be delayed," a market analyst said, requesting anonymity due to the sensitivity of the matter.

Of the total 620,000 bitcoins given away by Bithumb on Friday, 99.7% were retrieved by the exchange, according to the initial investigation results by financial authorities. Of the 1,786 bitcoins already sold before the exchange suspended transactions, 93% were retrieved.

On media reports that Bithumb gave away more bitcoin than it actually held, FSS's Lee said the issue of "ghost coins" would have to be resolved first for cryptocurrencies to become legacy financial assets.

Those who already sold the accidentally given bitcoins are legally obligated to return them to the exchange, Lee added.

On the government's policy plan to introduce spot bitcoin exchange-traded products, Lee said he would express cautious views that stability needed to be ensured for it to be regarded as a legacy financial asset.

(Reporting by Jihoon Lee; Editing by Muralikumar Anantharaman)

((jihoon.lee@thomsonreuters.com;))