South Korea launches probe into Bithumb over $43 billion fat-finger incident

South Korea's financial watchdog has launched an in-depth investigation into local crypto exchange Bithumb after it mistakenly sent about $43 billion worth of bitcoin to users last week.

Yonhap news agency reported Tuesday that the Financial Supervisory Service decided to escalate what was supposed to be a routine inspection into a full-scale investigation following last week's debacle.

One FSS official told Yonhap that the agency is conducting the probe with the "utmost seriousness," adding that authorities will take stern measures against any conduct that undermines market order.

Authorities are reportedly centering their probe on how Bithumb distributed a volume of bitcoin that significantly exceeded its actual reserves.

Fat finger

On Feb. 6, the South Korean exchange accidentally distributed 620,000 BTC ($43.1 billion) across hundreds of user accounts as part of a promotional campaign giveaway. The error reportedly stemmed from a staff member inputting the reward unit as BTC instead of KRW (Korean won).

Bithumb has since announced that it has recovered 99.7% of the falsely distributed bitcoin and 93% of the 1,788 BTC that users sold. Around 125 BTC remains out of its reach. 

The exchange said that it would compensate affected users at 110% of their losses, as the incident caused the bitcoin-Korean won trading pair to plunge about 15% on its platform. Bithumb further stated that it will strengthen its internal control system and set up a 100 billion won ($68 million) user protection fund that would rescue users in any unexpected events.

While Bithumb moved swiftly to recover funds and compensate users, the exchange has faced ongoing criticism as the fat-finger incident exposed systemic vulnerabilities. Specifically, the ability to generate and execute transactions for massive, non-existent bitcoin balances highlighted critical flaws in its internal risk management. Although 620,000 BTC was moved during the incident, Bithumb reportedly held only about 46,000 BTC at the time

Spillover effect

Local media reports pointed out that the Bithumb incident may adversely impact crypto's social standing in South Korea amid ongoing efforts to legislate the Digital Asset Basic Act, the country's second comprehensive crypto legal framework.

"This is no mere mishap," wrote Na Kyung-won, lawmaker and member of the opposition People Power Party. "If an exchange operates by merely shifting numbers on an internal ledger without actual on-chain movements, it means they could be selling bitcoin they don't even own. This effectively sets the stage for a 'bank run' and total market collapse."

Choi Bo-yoon, the chief spokesperson for the People Power Party, said the operational competence of local digital asset exchanges has already reached a "failing grade."

The ruling Democratic Party also weighed in, saying the incident exposed "critical loopholes" in internal control and ledger management systems of exchanges.

In the wake of the incident, the ruling party formally announced plans to impose a 15% to 20% cap on individual stakes in cryptocurrency exchanges. The proposal had previously received pushback from the industry, saying it would stifle growth.

The Bithumb fiasco has also reportedly prompted financial authorities and legislative bodies to discuss tougher measures that would impose legal responsibilities on crypto exchanges comparable to those faced by traditional financial institutions.