"Ghost coin not just a simple fat-finger"…Lawmakers lambast Bithumb and regulators alike

National Assembly’s Political Affairs Committee diagnoses the ‘Bithumb incident’

Shock from erroneous payout of 620,000 ‘ghost bitcoins’

"Not a simple fat-finger but systemic shortcomings"

Questions of regulators’ responsibility too…"due to a regulatory vacuum"

A wave of sharp criticism erupted in the National Assembly over last week’s erroneous bitcoin (BTC) payout incident at crypto exchange Bithumb. At the same time, lawmakers also raised the issue of regulators’ responsibility for failing to accelerate institutional improvements and legislative follow-up.

On the 11th, the National Assembly’s Political Affairs Committee held a plenary session at the National Assembly building in Yeouido, Seoul, and received a work report from financial authorities regarding the ‘Bithumb incident.’ Attendees included committee lawmakers as well as Bithumb CEO Lee Jae-won, Financial Supervisory Service (FSS) Governor Lee Chan-jin, and Financial Services Commission (FSC) Vice Chair Kwon Dae-young.

The Bithumb incident refers to a case in which Bithumb mistakenly paid out 620,000 bitcoins to users during the process of distributing rewards for an in-house promotional event. According to authorities, 618,000 of the 620,000 paid out have been recovered, but 1,788 bitcoins that were already sold have reportedly not yet been retrieved.

CEO Lee attended the meeting and said, "I sincerely apologize to the public for causing concern due to our company’s erroneous payout incident related to the event," adding, "I apologize for causing serious concern to customers who trusted South Korea’s virtual-asset market and to those who have worked toward sound industry development." He continued, "As the person ultimately responsible for this incident, I feel a deep sense of accountability," and said, "We will comprehensively review internal controls and systems and prepare measures to prevent recurrence."

System shortcomings put on the chopping block

Committee members broadly agreed that this was not a simple ‘fat-finger’ (order-entry mistake) accident, but one stemming from vulnerabilities in Bithumb’s internal systems.

Kim Nam-geun, a lawmaker from the Democratic Party of Korea, said, "I understand Bithumb actually holds 42,000 bitcoins, but the issuance of 620,000 on the books is tantamount to creating ghost coins," adding, "This means Bithumb’s real-time balance-to-ledger reconciliation system, segregation of event accounts, and verification procedures for large-scale payouts did not function properly either."

In particular, lawmakers pointed to Bithumb’s real-time balance-to-ledger reconciliation system as weaker than those of other exchanges. Kim said, "I understand Upbit operates a system that automatically matches actual wallet holdings and ledger quantities every five minutes," and asked, "But doesn’t Bithumb lack a properly established real-time reconciliation system, leading to bitcoin being paid out in excess of actual holdings?"

Lee acknowledged, "We do check information on the digital assets we hold in real time," but admitted that "for this event payout, the real-time reconciliation system did not operate properly."

FSC Vice Chair Kwon said, "I agree that an interfaced system is needed so that actual holdings and ledger quantities match in real time," adding, "We will reflect this in the second-stage legislation."

Kim Sang-hoon, a People Power Party lawmaker who chairs the party’s special committee on stock and digital-asset value-up initiatives, also expressed disappointment. He said the incident could dent trust in crypto exchanges, which have recently been mentioned as one of the potential issuers of stablecoins (virtual assets whose value is pegged to fiat currencies).

Kim said, "Do you know what stance the Bank of Korea has recently taken on crypto exchanges?" and noted, "There are concerns that crypto exchanges’ operations themselves are not stable, and when something like this happens, market trust is bound to be shaken significantly." He added, "It made me think it is premature to expand stablecoin issuers to crypto exchanges."

"The Bithumb incident—financial authorities also bear responsibility"

Some also argued the incident could have been prevented at the level of financial authorities.

Min Byung-deok, a Democratic Party lawmaker, said during questioning on pending issues, "The primary responsibility for this incident clearly lies with Bithumb," but added, "At the same time, the authorities also made mistakes."

The argument is that internal-control and payout-management standards related to the Bithumb incident could have been codified in advance, but a regulatory vacuum emerged due to contentious issues such as limits on major shareholders’ ownership stakes at exchanges and the question of who may issue stablecoins.

Specifically, Min criticized, "When the National Assembly enacted the User Protection Act in July 2023, it requested in an附帯 opinion that follow-up legislation be prepared within one year, but it still hasn’t been implemented," adding, "Even though bills containing recurrence-prevention measures such as stronger internal controls have already been submitted in the National Assembly, the authorities failed to pick up the pace, and as a result they could not prevent this incident."

The People Power Party side also pressed financial authorities on accountability. Kang Myung-gu, a People Power Party lawmaker, said, "You shouldn’t try to link the Bithumb erroneous payout incident to limits on major shareholders’ stakes," and asked, "In the 2018 Samsung Securities ghost-share incident, did anyone talk about stake regulation?"

Kang continued, "Virtual-asset trading systems are not fundamentally different from stock trading systems, and if inspections had been carried out thoroughly after the Samsung Securities incident, this incident could have been prevented," adding, "Financial authorities must fulfill their responsibility for shortcomings in management and supervision."

FSS Governor Lee replied, "We will properly inspect the state of operations."