Key Insights:
- Bithumb goes to court after some users decline to repay the bitcoin that was sent
- Most of the money was retrieved, but Bithumb used its reserves to offset the loss of 1,788 BTC
- Regulatory authorities have since made it mandatory for exchanges to check balances immediately
South Korean crypto exchange Bithumb has filed a lawsuit to recover digital assets it mistakenly sent out during a promotional event in February, the first notable step in addressing what has come to be known as the Bithumb bitcoin error. The exchange has since shifted to recover the remaining funds through court-supported actions, following the failure of the section of the bitcoin that was wrongly transferred to be returned voluntarily.
Bithumb Bitcoin Error Leads to Court-Ordered Asset Freeze
In a report by the local newspaper Chosun Biz on Thursday, Bithumb has recently asked a court to issue provisional seizure orders on accounts related to the incident. The operation led to the freezing of assets worth approximately 7 BTC, or about $496,000.
According to Chosun Biz, Bithumb detected the issue shortly after execution and rolled back the transactions within minutes. Nonetheless, by the time the reversal process was complete, some of the disbursed bitcoin had already been transferred out of recipient accounts.
Recovery Operations and Ongoing Controversies.
After the incident, Bithumb reported that it had recovered 99.7% of funds within the same day. The remaining 0.3%, equivalent to 1,788 BTC that had already been liquidated, was covered using the company’s internal reserves.
Most users who received the funds returned them after the exchange contacted them. Nonetheless, a few recipients have refused to comply, citing that the platform is to blame for the operational error. Such users have insisted that they are not obligated to return the assets.
The platform has intensified its recovery measures for the remaining funds and has opted for legal action, as the voluntary process has not been entirely successful. According to industry sources quoted in the report, any attempt to retain the money could result in a loss, as South Korean law treats it as an unjust enrichment issue.
Regulatory Action Following the Bithumb Bitcoin Error
The Bithumb Bitcoin error has prompted direct action from South Korea’s Financial Services Commission (FSC). Earlier this week, the regulator instructed all domestic cryptocurrency exchanges to align their internal accounting systems with real-time asset balances at five-minute intervals.
The directive followed an inspection that found three of the country’s five major exchanges were reconciling balances only once per day. This was viewed by regulators as a factor that could affect the timely identification of problems.
The new requirement was designed to ensure that exchanges could detect suspicious activity in time and act on it before funds were transferred. According to the FSC, this was one of the measures being taken to improve internal controls in the industry.
Impact on Industry Regulation
The Bithumb Bitcoin incident has also been criticized by policymakers for the organization’s poor risk management. The legislators were concerned about how the exchange was handling transactions involving bitcoin amounts far beyond what Bithumb owned.
The reports revealed that while Bithumb handled transactions worth 620,000 BTC, Bithumb owned only 46,000 BTC.
As such, debates have become even more fervent over imposing tougher legal obligations on crypto exchanges. Following this occurrence, the ruling party in South Korea, the Democratic Party, introduced proposals to introduce a limit of 15-20% on the number of shares each person can own in cryptocurrency exchanges. Initially, industry representatives opposed this proposal.
