Is Bithumb’s 620,000 Bitcoin Mishap a Turning Point for Crypto Exchange Regulations?

In an unprecedented incident, Bithumb mistakenly issued 620,000 Bitcoin (BTC) during an event, prompting the National Assembly to scrutinize the governance and internal control systems of virtual asset exchanges.

This long-awaited reform has been at a standstill for years. The second stage of virtual asset legislation has veered towards regulations that impose unprecedented restrictions on major shareholders and favor a bank-centric structure, diverging from global standards. The Bithumb incident, described by industry insiders as an “own goal,” has intensified opposition from the sector and poses a significant challenge to the second stage of legislation.

From the authorities’ perspective, this incident provides justification to tighten regulations, such as limiting the shareholdings of exchange major shareholders. The industry is on high alert, wondering whether this situation will lead to stricter oversight.

The National Assembly’s Political Affairs Committee plans to hold an emergency meeting on the Bithumb incident on the morning of the 11th at 10 AM at the National Assembly building. According to industry sources, a committee representative stated, “We will finalize the attendees after discussions and request their presence. It’s highly likely that current executives, including Bithumb CEO Lee Jae-won, will be central to this.”

Notably, lawmakers from both parties agreed to demand the attendance of Lee Jung-hoon, the founder of Bithumb Holdings. Lee holds substantial control over Bithumb, which the Fair Trade Commission has designated as the “same person” governing Bithumb. However, the request for attendance lacks legal enforcement, leaving his actual presence uncertain.

This incident has also raised questions about how Bithumb’s governance structure and decision-making processes have affected internal controls. A committee representative remarked, “While the Bithumb incident itself is an isolated event, the governance and management environment have been ongoing issues. If necessary, we can request the attendance of executives to investigate whether there were any problems.”

The emergency inquiry stems from Bithumb mistakenly distributing 620,000 Bitcoin (approximately 62 trillion KRW (about 46.5 billion USD)) during an event on the 6th. Although Bithumb has recovered 99.7% of the mistakenly issued amount, some users sold their Bitcoin before the company recognized the error, causing a temporary drop in the market price and resulting in market chaos.

At the time, Bithumb only held about 42,000 Bitcoin, raising concerns about “phantom coins” when 620,000 were distributed. Industry experts consider this incident a revelation of structural flaws in the internal control system.

The committee is expected to rigorously investigate the circumstances of the incident, why the internal control system failed, and whether the financial authorities bear any responsibility for oversight.

The Bithumb incident also poses a variable for the second stage of legislation, which includes regulations on virtual asset disclosures, issuances, and stablecoins. Observers speculate that this incident may shift the focus toward strengthening exchange regulations.

The ruling Democratic Party’s Digital Asset Task Force (TF), which initially aimed to propose the legislation before the Lunar New Year holiday, has reported a consolidated bill to Policy Committee Chair Han Jeong-ae. However, the Financial Services Commission advocates for limiting major shareholder ownership in exchanges to levels comparable to alternative trading systems (15-20%). Additionally, they are discussing imposing strict liability on virtual asset service providers (VASPs) in the event of technical failures.

The industry has strongly opposed such measures. Recently, the Digital Asset Exchange Alliance (DAXA), the Korea Fintech Industry Association, and the Internet Companies Association released a statement asserting that the Financial Services Commission’s proposals could stifle innovation. Advisors to the Digital Asset TF have also submitted opinions arguing that there is insufficient logical basis for limiting major shareholder ownership.

However, Chair Han emphasized during a recent party meeting that the Bithumb incident exposed vulnerabilities in the exchange’s bookkeeping and internal control systems beyond mere operational errors. She stressed the need to address systemic blind spots through assessments of major shareholder qualifications and to establish a governance structure that the public can trust.

The Financial Services Commission also held a review meeting on the 8th, stating that it would pursue measures to define strict liability in cases where user harm occurs due to technical failures.

As the Bithumb incident expands into parliamentary discussions, the industry is closely monitoring the potential for stricter exchange regulations.

Industry representatives argue that it is essential to carefully evaluate the direct causal relationship between this incident and the limitation on major shareholder ownership. While there is consensus on the need to strengthen internal controls to prevent future incidents, they suggest that restructuring ownership does not address the root cause of the issue. In fact, various financial incidents and internal control issues continue to plague banks without clear ownership structures.

An industry insider stated, “While it is necessary to enhance the internal control system, we must examine the connection between ownership regulations and the incident more closely. We need to establish rational preventive measures and accountability structures.”