Since the South Korean prosecution started investigating Upbit, the country’s largest cryptocurrency exchange, more events have unfolded. While local media still discuss allegations and raise questions about Upbit’s business practice, some people believe that Upbit is already in the clear. The investigation continues.
The Allegations: Book Trading and Liquidity Risks
Local media reported that Upbit currently lists 137 cryptocurrencies, but about 40 of them do not support e-wallets. South Korean prosecutors accuse the exchange of “book-trading” — facilitating trades of cryptocurrencies without actually holding the coins. If users request a transfer or withdrawal all at once, Upbit would not be able to return their money immediately, which could be deemed fraudulent. However, some argue that most domestic trading sites adopt this method, except for those handling a small number of cryptocurrencies such as Bithumb. If this method is found to be an apparent fraud, the entire industry will be affected.
Upbit’s Response: Misunderstanding and Bittrex Partnership
Upbit calls the investigation “something that comes from misunderstanding.” The exchange insists that it will secure the needed cryptocurrencies as soon as it has brokered a transaction for the coins without a wallet, and has never bought or sold cryptocurrencies it did not own since opening last October. Furthermore, Upbit holds an exclusive partnership with U.S. exchange Bittrex. Crypto experts believe that the lack of understanding of Upbit’s trading system — which links with Bittrex — led to the suspicion of book trading. Cryptocurrencies traded in KRW are directly managed by Upbit, while other virtual currency transactions go through Bittrex under Upbit’s responsibility, constituting a legitimate book deal.
Previous Internal Audit: 100% Coin Matching
An article by Money Today cited Lee Seok-woo, president of Dunamu Inc. (which operates Upbit), stating that an internal audit in early March showed that the amount of coins in the books was 100% identical to the number of coins in the wallets. Some people took this as proof that Upbit is clear of wrongdoing, while others remain objective. Twitter user Nash wrote, “Not concluded yet. It’s just Upbit’s claim.” Korean media continue to raise questions and seek more answers.
Insider Trading and Money Laundering Concerns
Prosecutors are also investigating allegations of insider trading and money laundering. Some investors suspect that Upbit employees leak upcoming listing information, allowing outsiders to buy from overseas exchanges and sell on Upbit at higher prices. Additionally, the linkage with Bittrex allegedly makes it easier to transfer illegal business funds from domestic exchanges to the U.S. On fraud charges, a lawyer commented: “It is difficult to judge it as fraud because there is no victim. If the Capital Market Law applies to the exchange, it is a criminal offense. The lack of a clear baseline law is a bigger problem.” South Korea’s financial regulators have previously stated that cryptocurrency is not subject to the Capital Market Law because it is not a monetary product.
At the time of writing, the investigation into Upbit continues, and the industry awaits the prosecution’s final decision and potential regulatory clarity.