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, with no charges filed as of this writing.
The Allegations: Fraud, Book Trading, and Liquidity Concerns
Local media reported that prosecutors searched Upbit for fraud charges triggered by coinless transactions, suspicion of insider trading during the listing process, and allegations of money laundering and leakage of money through US trading sites. The most scrutinized accusation concerns the liquidity of some listed coins. Upbit currently lists 137 cryptocurrencies, but approximately 40 do not support e-wallets, according to Joongang Ilbo. Investigators suggest that if users requested withdrawals of these coins all at once, Upbit would be unable to return their money immediately, rendering the original transactions fraudulent. However, some argue that most domestic trading sites adopt this method, except those handling a small number of cryptocurrencies such as Bithumb. If this method is found to be ‘apparent fraud,’ the industry will not be much affected.
Upbit’s Response: ‘Misunderstanding’ of the Trading System
Upbit calls the investigation “something that comes from misunderstanding,” as reported by Joongang Ilbo. The exchange repeatedly dismissed the above accusation, emphasizing that it will secure the needed cryptocurrencies as soon as it has brokered a transaction for the coins without a wallet. Further, Upbit insists that it has never bought or sold cryptocurrencies that it did not own since it opened last October. Given Upbit’s exclusive partnership with the US exchange Bittrex, crypto experts believe that the lack of understanding of the Upbit trading system—linking the system with the overseas exchange—has led to the suspicion of book trading. A representative of another crypto exchange explained that except for the won market, Upbit transactions are made through Bittrex. “It is a legitimate book deal, and the prosecutors seem to have misunderstood why they are selling cryptocurrencies that they do not have.”
Internal Audit: 100% Coin Reserves Confirmed
An article by Money Today referenced an internal audit that reportedly happened earlier this year. Lee Seok-woo, president of Dunamu Inc. which operates Upbit, stated that in early March, when Upbit was suspected of only book transactions without holding coins, he was notified that the number of coins in the books was 100% identical to the number of coins in the wallets. Crypto of Korea tweeted that “Upbit claimed that they had the internal account audit… The audit shows that 100% of the coins are real, the ledgers all synced to their own wallets.” Some people subsequently took Upbit’s claim as clearing its name, while others remain objective—Twitter user Nash wrote, “Not concluded yet. It’s just ‘Upbit’s claim.’”
Insider Trading and Money Laundering Allegations
Prosecutors are also looking into allegations of insider trading and money laundering surrounding Upbit. News1 Korea noted that some investors have expressed strong suspicion that a person who receives information from an Upbit employee about an upcoming listing would buy the cryptocurrency from an overseas trading site and sell on Upbit. Furthermore, investigators alleged that illegal business funds are more easily transferred from the domestic exchange to the US due to the linkage with Bittrex. Regarding fraud charges, a lawyer commented that “it is difficult to judge it as a fraud because there is no victim. If the capital market law applies to the transaction site, it is a criminal offense. The lack of a clear baseline law is a bigger problem.” Joongang Ilbo further asserted that according to the country’s financial regulators, cryptocurrency is not subject to the Capital Market Law because it is not a monetary product.
Industry Impact and Ongoing Scrutiny
The investigation highlights the regulatory vacuum surrounding South Korean cryptocurrency exchanges. While Upbit maintains its compliance, the ongoing probe serves as a wake-up call for the industry, urging clearer rules to protect investors and ensure transparency. As of this writing, Korean media continue to raise questions about Upbit’s operations and seek more answers.