"Financial regulators weigh 'continuous verification' of crypto exchange balances"

South Korea’s financial regulators are reportedly reviewing a plan to continuously verify crypto-asset (cryptocurrency) balances held by exchanges, to prevent situations in which assets not actually held are traded on internal ledgers during the course of crypto-asset transactions.

According to the industry on the 9th, regulators are examining the need to build a system that can check in real time gaps between trading volume and actual holdings, following a recent case involving an erroneous crypto-asset transfer. The idea is to continuously confirm whether figures on an exchange’s internal ledger match assets actually held, enabling an immediate response when anomalies arise.

In the banking sector, there is a procedure to reconcile ledger transaction records with actual cash holdings after business hours, and financial assets such as securities are also checked frequently through relevant institutions. By contrast, the methods used to verify balances at crypto exchanges reportedly vary by company in terms of standards and frequency. Regulators believe this structure needs to be strengthened from the standpoint of user protection.

Accordingly, regulators are reviewing ways to standardize to a certain level the proof-of-reserves and verification systems that are currently dispersed across exchanges. They are also reportedly designing a framework under which an alert would be triggered if trading volume exceeds actual holdings by more than a certain level, and under which regulators would continuously monitor those indicators.

Meanwhile, regulators also reaffirmed their position that, in principle, all erroneously transferred crypto assets must be returned. They added that they plan to prevent a recurrence of similar cases by inspecting internal controls and overall IT systems.