Financial Services Commission holds ‘virtual asset industry meeting’… “Strengthen internal controls to the level of financial institutions”

Going forward, coin (virtual asset) exchanges must check every five minutes whether their electronic ledgers match the assets actually held, and establish an internal control framework on par with that of financial institutions.

They also decided to separate high-risk transaction accounts that inevitably require manual handling from proprietary accounts, and to introduce a “multiple-approval” procedure so that employees can cross-verify and approve transactions.

The Financial Services Commission (FSC) announced this on the 6th, after holding a meeting with the virtual asset industry at the Government Complex Seoul.

Previously, a domestic exchange on February 6 mistakenly entered the unit as “bitcoin” while attempting to pay out 620,000 won in event rewards, resulting in an erroneous distribution of 620,000 bitcoins. This amounted to 13 times more than the bitcoins it actually held, worth about 60 trillion won.

Afterward, the FSC, the Korea Financial Intelligence Unit (FIU), the Financial Supervisory Service (FSS), and the Digital Asset Exchange Alliance (DAXA) jointly formed an emergency response team to urgently inspect the status of user-asset custody and internal control systems at exchanges.

Based on this inspection, the FSC said the exchange’s balance reconciliation (checking exchange-held balances against ledger assets) system was inadequate, and that it lacked a “trade blocking measure (Kill Switch)” system to immediately halt problematic transactions.

Based on the findings, the FSC will mandate that all exchanges build a balance reconciliation system operating on a five-minute cycle. It will also specify “trade blocking measure standards” under which trading is automatically suspended when a large-scale discrepancy occurs.

High-risk transactions that are paid out manually, such as event rewards, will be segregated into separate accounts. In addition, a “validation system” will be built so that input units, total amounts, and other fields are checked against pre-set plans, and transactions are automatically rejected if discrepancies are found.

Furthermore, the roles of transaction entry and approval will be clearly separated, and a “multiple-approval framework” will be established through third-party cross-checks and differentiated approval authority by amount.

A “standard compliance monitoring program” will also be created to strengthen exchanges’ internal control frameworks to the level of financial companies. Reviews of internal control standard violations will be made more substantive, and the inspection cycle will be shortened from once a year to semiannually.

The frequency of audits conducted by external accounting firms will also be shortened from quarterly to monthly. The scope of disclosures of audit results will be expanded to include “wallets by virtual asset and the amount held on the ledger.”

A standard compliance monitoring program will be enacted to strengthen exchanges’ internal control frameworks to the level of financial institutions. Exchanges must inspect their internal control systems every half year and report the results to financial authorities.

Financial authorities plan to enact and revise self-regulatory rules for institutional improvements within this month, and to complete by next month the build-out of IT systems for continuous balance reconciliation and related measures.

By Noh Jeong-dong, Hankyung.com reporter dong2@hankyung.com