Crypto exchanges face record-high compensation demands for system glitch on martial law day

Bitcoin's price is displayed at Bithumb's customer lounge in Seoul, Wednesday. Newsis

Korea's top two virtual asset exchanges, Upbit and Bithumb, have agreed to pay a record-high 3 billion won ($2.1 million) in compensation, in response to system glitches and the subsequent service disruptions that occurred on the day of President Yoon Suk Yeol's martial law fiasco.

According to data from the Financial Supervisory Service (FSS) and the country's five virtual asset exchanges, Wednesday, Upbit agreed to pay 3.1 billion won for 596 system failures that occurred on Dec. 3. Bithumb agreed to compensate 377 million won for 124 cases.

The data was retrieved and released by Rep. Kim Hyun-jung from the Democratic Party of Korea.

Both exchanges are finalizing discussions with affected investors, meaning the total compensation amount could increase slightly. Other exchanges — Coinone, Korbit and GOPAX — were not implicated in the incident.

The compensation represents the largest number of cases and the highest amount ever related to service disruptions at virtual asset exchanges.

Upbit, Korea's largest virtual asset exchange, previously compensated 50 cases with a total payout of 11.4 million won in 2022. Bithumb, the second-largest, paid 94 million to 29 individuals in 2023.

The latest compensation issue came as the Dec. 3 incident led to a significant surge in panicked investors. Within hours of Yoon's announcement, Bitcoin's price plummeted from 130 million won to 88 million won.

Upbit's concurrent users soared to over 1.1 million, while it typically handles around 100,000 at a time. Similarly, Bithumb and Coinone both experienced surges of over 500,000 users. This influx disrupted access to the exchanges, causing delays and even cancellations of cryptocurrency withdrawals and Korean won deposits.

The exchanges' failure to manage this surge has drawn scrutiny over their management practices. In response, the FSS resumed on-site inspections of the exchanges on Monday, continuing its efforts from last month.

Reports submitted to the FSS outlined measures being implemented by the exchanges, including server expansions, cloud migrations and enhancements to business continuity plans (BCP). The inspections will assess the effectiveness of these measures.

"Despite the rapid growth in cryptocurrency investors, the institutional framework for investor protection remains inadequate," Kim said. "Financial authorities and virtual asset exchanges must develop practical and concrete measures, such as server expansions and BCP enhancements, to prevent system failures and establish a secure and reliable cryptocurrency ecosystem."

At the same time, the Financial Intelligence Unit under the Financial Services Commission is also pursuing sanctions against Upbit for alleged violations of customer verification procedures and noncompliance with anti-money laundering obligations.