Multiple South Korean media outlets have reported that the country’s biggest cryptocurrency exchange Upbit is being investigated by the Financial Supervisory Service (FSS) for suspected fraud. According to the reports, there are anomalies with regard to the exchange’s liquidity as well as trading volume. While this report is absolutely correct, the interpretation of this information is absolutely incorrect. There is no fraud, rather a misunderstanding with regard to how liquidity actually works in a cryptocurrency exchange.
Investigating Irregularities in South Korea
On May 13, the FSS announced that it had formed a separate task force that would investigate irregularities as well as illegal activities in crypto exchanges as well as the industry in general in South Korea. One of the issues the FSS is investigating is exchanges deceiving investors by lying about owning cryptocurrencies or funds on their platforms that actually don’t exist.
The FSS, during a press conference, emphasized that it is illegal for an exchange to inflate its holdings. Exchanges are also not allowed to process transactions for their clients without actually transferring their funds.
The liquidity issue that Upbit was investigated for was not related to this, however, wires got crossed by media reports.
Upbit Sharing Liquidity with Other Exchanges
It is not uncommon for cryptocurrency exchanges to share liquidity for a lot of cryptocurrencies as this pooling of resources increases liquidity for all the trading platforms.
Yes, the investigation is centered on the issue of liquidity, however, not in the way the media has projected it. Authorities are trying to get a better understanding of how the process of liquidity works at cryptocurrency exchanges, hence the investigation.
According to CNBC reporter Ran Neuner, an insider source authorities found issues with the exchange’s liquidity, but all was normal and that the exchange was not going to be charged with any criminal, illicit or fraudulent activities. The only fallout expected from this investigation will be a simple warning to Upbit to not share liquidity with other exchanges.
Had authorities found instances of actual fraud, the cryptocurrency exchange would have been shut down immediately. That is not the case – Upbit is still trading normally.
Media’s Lack of Education Hurts Crypto Market
South Korea is one of the biggest markets for cryptocurrencies, which means that any issue in this country will have a ripple effect all over the world. Thanks to the South Korean media misunderstanding the situation, something simple has been blown out of proportion. This is what led to the massive cryptocurrency sell-off last week.