South Korea's financial regulatory body has initiated a formal investigation into cryptocurrency exchange Bithumb on Tuesday. The probe aims to determine how the platform distributed Bitcoin valued at over 60 trillion won (approximately $412 billion) to its customers, despite reportedly not actually possessing the cryptocurrency, according to industry sources.
Sources familiar with the matter indicated that the regulator notified the exchange of the investigation on Monday. This notification came just three days after officials conducted an on-site inspection of the company's operations.
"We are treating this case with the utmost seriousness," stated an official from the Financial Supervisory Service (FSS). "The FSS will enforce strict legal measures against any actions that disrupt market order."
The investigation follows an incident last Friday where Bithumb erroneously distributed 620,000 Bitcoin to 249 customers during a promotional event, instead of the intended 620,000 Korean won. This error contributed to a decline in the price of Bitcoin on the exchange's platform.
In an official statement, the cryptocurrency exchange acknowledged the mistake. It confirmed that a majority of the incorrectly transferred Bitcoin was recovered shortly after the incident occurred. However, 1,788 tokens had already been sold by recipients before the recovery process was complete.
Centralized exchanges like Bithumb utilize a "book-entry transaction system." Under this framework, the exchange records ownership within its internal database and executes trades electronically, rather than logging each individual transaction directly onto the public blockchain.
If mismanaged, such a system can potentially generate "fictitious balances," leading to discrepancies between the amounts listed for users and the actual reserves held by the exchange.
As of the end of September last year, Bithumb held approximately 42,000 Bitcoin. Of this total, all but 175 Bitcoin were cryptocurrencies held in custody on behalf of clients.
The launch of Tuesday's investigation coincides with ongoing deliberations in the South Korean National Assembly regarding legislation related to virtual assets.
Lee Chan-jin, the Chairman of the Financial Supervisory Service, emphasized the critical importance of addressing issues related to "phantom virtual currency" during a press conference on Monday. He stated that the findings from the Bithumb investigation would be taken into consideration during the revision of the pending virtual asset bill.