South Korea’s financial regulator has escalated its response to Bithumb’s massive bitcoin overpayment incident, launching an intensive inspection that could reshape oversight standards for domestic cryptocurrency exchanges.

According to local media reports, the Financial Supervisory Service upgraded what began as an on-site inspection into a formal investigation just days after the error came to light. 

Officials said the decision reflected the severity of the incident and its potential to undermine confidence across the broader virtual asset market.

An FSS official told Yonhap News Agency that regulators are approaching the case with “utmost seriousness,” warning that any actions found to disrupt market order would face strict consequences. 

Additional personnel have reportedly been deployed to support the inspection as authorities widen the scope of their review.

The probe centres on how Bithumb was able to distribute bitcoin volumes far exceeding its actual holdings.

On Feb. 6, the exchange mistakenly credited 620,000 BTC, valued at about $43.1 billion, to hundreds of user accounts during a promotional campaign. 

The error was attributed to a staff member entering the reward unit as BTC instead of Korean won.

Regulators are now scrutinising whether Bithumb’s internal systems failed to prevent the issuance of assets that did not exist. 

As of the third quarter of last year, Bithumb held roughly 42,000 BTC, including 175 BTC on its own balance sheet, with total holdings estimated to have risen to about 46,000 BTC more recently. 

The mistaken payout amounted to roughly 13 to 14 times that figure.

Authorities are also examining the exchange’s reliance on internal ledger-based transactions, a structure common among centralised exchanges where customer balances are adjusted internally without immediate on-chain settlement. 

Officials are assessing whether this setup allowed the erroneous bitcoin balance to be generated and whether users could have withdrawn the full amount in a single event.

Bithumb has said it recovered 99.7% of the misallocated bitcoin and reclaimed 93% of the 1,788 BTC that users sold following the incident.

Around 125 BTC remains unrecovered. 

The exchange pledged to compensate affected users at 110% of their losses after the BTC-KRW trading pair briefly plunged about 15% on its platform.

Bithumb also announced plans to tighten internal controls and establish a 100 billion won, or about $68 million, user protection fund to cover unexpected losses.

Still, criticism has mounted as the episode exposed gaps in monitoring systems that should have flagged discrepancies between ledger balances and actual reserves.

Lawmakers from across the political spectrum have seized on the incident as evidence of deeper structural issues. 

Opposition lawmaker Na Kyung-won warned that exchanges operating on internal accounting alone risk creating conditions similar to a bank run if customer trust erodes. 

Meanwhile, People Power Party spokesperson Choi Bo-yoon described the operational standards of local exchanges as having reached a “failing grade.”

The ruling Democratic Party echoed those concerns, arguing that the error revealed “critical loopholes” in ledger management and internal oversight. 

In the wake of the incident, the party renewed efforts to advance a proposal capping individual ownership stakes in crypto exchanges at 15% to 20%, a measure previously resisted by industry participants.

Financial authorities are now weighing whether the case constitutes a breach of the Virtual Asset User Protection Act, which requires exchanges to hold virtual assets of the same type and quantity as those entrusted by users. 

The inspection findings are expected to feed directly into the second phase of South Korea’s digital asset legislation, including revisions to bookkeeping, custody, and internal control standards.

FSS Governor Lee Chan-jin said recently that failure to properly resolve the so-called “ghost bitcoin” issue raises serious questions about how virtual assets can be safely integrated into the formal financial system. 

Regulators have also formed an emergency task force with the Korean Financial Intelligence Unit and the Digital Asset eXchange Alliance to review industry-wide practices and identify high-risk vulnerabilities.

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