Investigation of South Korea’s Largest Crypto Exchange Upbit Continues

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.

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The Allegations

Local media reported on Friday that South Korea’s largest cryptocurrency exchange, Upbit, is under investigation for alleged fraud. More information has surfaced since, casting doubt on whether the allegations can be considered fraud. No charges have been filed against Upbit at the time of this writing. However, the prosecutors have confiscated the exchange’s computers and records as part of the investigation.

On Monday, News1 Korea described:

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.

Liquidity Issue

The first allegation, the most heavily scrutinized, concerns the liquidity of some of the coins listed on Upbit.

The exchange currently lists 137 cryptocurrencies but not all of them have wallets. South Korean prosecutors are accusing the exchange of “book-trading” where Upbit facilitates the trading of cryptocurrencies without actually having the coins in its possession. Joongang Ilbo elaborated:

Of the more than 130 cryptocurrencies currently traded on Upbit, about 40 do not support e-wallets.

News1 also pointed out that there is a viewpoint among investigators that if users request a transfer or withdrawal of their coins all at once, then Upbit will not be able to return their money immediately, which would render the original transactions fraudulent.

However, some argue that “most domestic trading sites are adopting this method” except those that handle a small number of cryptocurrencies such as Bithumb, the news outlet conveyed, adding that if this method is found to be an “apparent fraud…[then] the industry will not be much affected.”

Upbit Calls It a Misunderstanding

Upbit says that this investigation is “something that comes from misunderstanding,” Joongang Ilbo reported.

The exchange has 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, the news outlet detailed. In addition, Upbit insists that it has “never bought or sold cryptocurrencies that it did not own since it opened last October.”

Furthermore, given Upbit’s exclusive partnership with the US exchange Bitrex, crypto experts believe that “the lack of understanding of the Upbit trading system that links the system with the overseas exchange has led to the suspicion of book trading,” the publication emphasized, adding:

Cryptocurrency traded in KRW is directly managed by Upbit, and when customers buy other virtual currencies…transactions are made through Bittrex under the responsibility of Upbit.

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.”

Previous Internal Audit

Another factor at play is an article published by Money Today on Tuesday, referencing an internal audit which reportedly happened earlier this year. The news outlet quoted Lee Seok-woo, president of Dunamu Inc. which operates Upbit, saying that “In early March, when Upbit was suspected of only [conducting] book transactions without [holding the] coins…I have been notified that the amount of coins [in the books] is 100% identical to the number of coins” in the wallets.

Referencing the above article, Twitter user Crypto of Korea wrote, “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 the exchange being clear of wrong-doing in this current investigation, while others remain more objective. Twitter user Nash wrote, “Not concluded yet. It’s just “Upbit’s claim.” Meanwhile, Korean media still raise questions about Upbit’s operations and seek more answers at the time of this writing.

Insider Trading and Money Laundering Concerns

The prosecutors are also reportedly looking into allegations of insider trading and money laundering surrounding Upbit, News1 Korea wrote, noting that “some investors have raised strong suspicion that there is insider trading” at the exchange. “It is suspected that a person who receives information from an Upbit employee about an upcoming listing [on Upbit] would have bought the cryptocurrency from [an] overseas trading site and sold on Upbit.”

Furthermore, the investigators alleged that “illegal business funds are more easily transferred from the domestic [exchange] to the US due to the linkage with Bittrex,” the publication described.

As for any fraud charges, a lawyer was quoted by the news outlet commenting:

It is difficult to judge it as a fraud because there is no victim. If the capital market law applies to the transaction site [Upbit], it is a criminal offense. The lack of a clear baseline law is a bigger problem.

Joongang Ilbo further asserted that according to the position of the country’s financial regulators, “cryptocurrency is not subject to the Capital Market Law because it is not a monetary product.” In the unlikely event that the prosecutors can apply the Capital Market Law to this case, commissions through book transactions would be considered criminal proceeds, the news outlet explained.

Do you think Upbit has done anything wrong? Let us know in the comments section below.

Images courtesy of Shutterstock, Twitter, and Upbit.

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