Summary:
- South Korea requires crypto exchanges to reconcile holdings every five minutes.
- The move follows an inspection triggered by the Bithumb payout incident.
- Regulators found slow reconciliation cycles and weak trade-halting systems.
- Exchanges must improve internal controls and introduce stricter safeguards.
- New rules are expected to be finalized within April
South Korea is tightening oversight on crypto exchanges after identifying gaps in platforms that manage user funds. The country's Financial Services Commission (FSC) has ordered all exchanges to reconcile their internal records with actual asset holdings every five minutes. The directive was announced following a meeting between regulators, major exchanges, and the Digital Asset Exchange Alliance (DAXA). The discussion focused on findings from an emergency inspection launched earlier this year. This inspection was triggered by a high-profile incident involving Bithumb, where a payout error exposed weaknesses in exchange systems. In response, authorities formed a dedicated unit in February to review exchanges that handle user assets, internal processes, and operational risks.
The outcome pointed to a key issue - delays in verifying whether exchange records actually match the assets they hold. In simple terms, exchanges keep internal ledgers that track user balances. These need to match the real assets stored in wallets. If they don't, it can lead to serious problems, especially during errors or system failures. To address this, regulators are now requiring near real-time checks.
What the Inspection Found
The inspection results regulators moved. Out of the country's five major exchanges, three were only reconciling their balances once every 24 hours. That means discrepancies could go unnoticed for an entire day. In a fast-moving market, that delay creates risk. If something goes wrong, exchanges may not catch it in time to prevent further impact. The review also found issues with systems designed to halt trading during major mismatches. These safeguards are meant to stop activity if balances don't align, but in several cases, they were not strong enough.
The Bithumb incident showed these gaps can play out in real time. In February, the exchange mistakenly distributed 620,000 Bitcoin to 249 users during a promotional event. The scale of the error was significant, but the response was relatively fast. Bithumb managed to recover 99.7% of the funds on the same day. The remaining 0.3%, around 1,788 BTC that had already been sold, was covered using the company's own reserves. While the situation was contained, it highlighted how important it is to detect issues early. If reconciliation happens more frequently, exchanges can respond before problems escalate.
New Rules Go Beyond Reconciliation
The five-minute verification rule is just one part of a broader set of changes. Regulators are also asking exchanges to improve the way they handle high-risk operations. This includes activities like promotional payouts, which will now require stronger oversight. Measures such as third-party cross-checks and multi-level approvals are expected to become standard. There is also a push to separate high-risk accounts from regular operations. This helps limit the impact if something goes wrong in a specific area. On top of that, exchanges will need to introduce clearer rules for when trading should be halted. Also, systems must be able to trigger automatic pauses when certain conditions are met.
External oversight is also being tightened. Audits, which were previously conducted on a quarterly basis, will now take place monthly. At the same time, disclosure requirements will expand, with exchanges expected to provide more detailed information about asset balances across wallets and internal ledgers. The FSC made it clear that these changes are moving quickly.
Closing Thoughts
South Korea has often taken an active role in regulating digital assets, and this move adds another layer to that approach. It also sets a reference point for other jurisdictions that might handle similar risks. However, with checks now expected every five minutes, the margin for error is getting much smaller.