Earlier this month, the local police, Korea Financial Intelligence Unit (KIU), and Financial Services Commission (FSC) raided and investigated UPbit, the country’s biggest cryptocurrency exchange.

Premature Investigation

The government of South Korea accused UPbit of conducting fraudulent activities by deceiving investors and inflating its balance sheet. The KIU obtained the hard drives and computers at the UPbit headquarters to analyze cryptocurrency holdings and user funds managed by the company and if the amount noted in the official balance sheet of UPbit matched the actual holdings of the exchange.

Initially, the South Korean government stated that the investigation and analysis are set to take several days, maximum five days. Nearly two weeks have passed and the government is yet to release its official report on the case. Local experts have suggested that authorities have not found any irregularity and they have not released their official report because the authorities do not plan to bring up any charges against UPbit.

An insider source told the Korea Herald:

“As no investors seem to have been affected by Upbit’s alleged business practices, it would not be easy for the authorities to bring any charges to bear. But a series of prosecution probes into the exchanges did effectively hurt the overall credibility of the industry.”

The government’s abrupt decision to raid the headquarters of UPbit led investors in the local cryptocurrency market to be concerned about the short-term future of the market. Many investors have lost trust in local exchanges after the UPbit incident.

Oh Jeong-geun, a professor at Konkuk University, a prestigious private university based in Seoul, emphasized that if the market fails to recover from the latest UPbit scandal, even though no irregularities have been found and UPbit has not conducted any fraudulent operation, it could lead investors to leave the cryptocurrency market forever.

“Along with diversification efforts, priority should be put on ensuring the smooth operation of their trading systems in order to guarantee their growth potential. Lack of reliability would cause investors to leave the market forever,” said Oh.

Due to the sheer scale of the scandal and the mainstream media coverage it has received both domestically and internationally, Oh noted that it will not be easy for local investors to dismiss the situation instantly and move on.

Solution

The cause of the UPbit incident is a simple misunderstanding by the government. Instead of raiding the headquarters of the exchange, the government could have sent its cryptocurrency task force within the FSC and cooperate with UPbit to understand its structure and practices.

If the South Korean government admits that it has found no irregularities in the UPbit investigation, it will need to ensure that investors in the local cryptocurrency market are aware of the situation and the legitimacy of UPbit’s operations. Considering that the government initiated the investigation and ultimately the scandal, the only organization that could eliminate controversy around it is the government and local financial authorities.

Previously, when the Justice Minister of South Korea prematurely announced a “ban” on cryptocurrency trading, the Blue House, the executive office of President Moon Jae-in released a public statement to refute the announcement of the Justice Minister.

It is possible that the Blue House and the FSC will release an announcement in the short-term to stabilize the market.