Upbit, South Korea’s biggest crypto exchange by daily trading volume, allegedly had over $250 billion in fake orders through replicated accounts and inflated volumes.
According to Yonhap, a mainstream media outlet based in South Korea, two executives of Upbit and a major shareholder of the company were arrested by local police on December 21 under allegations of conducting fraudulent operations and manipulating the cryptocurrency exchange market.
Bad Look For the South Korean Crypto Market
After acquiring Daum, the second largest search engine in South Korea, Kakao began to assert its dominance over virtually every internet-related industry in the local market. As of December, Kakao remains control of at least 60 percent market share in the industry of messaging (KakaoTalk), ride-hailing (KakaoTaxi), social media (KakaoStory), and online stock brokerage (KakaoStock).
Despite its late start, the popularity of Upbit continued to grow exponentially due to the involvement of Dunamu, the compatibility of Upbit with KakaoPay, and stable bank deposits and withdrawals the exchange provided. Bithumb’s two consecutive hacking attacks in mid-2018 eventually led Upbit to take the lead and become the largest exchange in the local market.
However, the Supreme Prosecutors’ Office of the Republic of Korea’s allegation toward Upbit and the unforeseen arrest of three key individuals involved in the development and operation of Upbit has put the company at risk of losing its position for the first time since early 2018.
In an official report, the prosecutors claimed that Upbit executives created a fake account with the ID “8” and put $110 million in the account. The prosecutors said that the account, which demonstrated a balance of $110 million, did not have the funds in it and it was faked in an attempt to inflate the volume of the exchange.
The prosecutors also claimed that more than $250 billion in fake orders were recorded from September to November of last year and the amount that was traded with the account in question exceeded $1 billion.
Currently, the prosecutors are investigating whether Upbit intentionally utilized bot trading to intensify the “Kimchi Premium” and increase the price of Bitcoin on its exchange to sell at a higher value.
In May, the prosecutors conducted a search and seizure at Upbit headquarters, obtaining the hard drives and computers of key figures at the company.
In an official statement, Upbit denied all of the allegations put forth by the prosecutors. The statement read:
“For eight months of investigation, our company has sincerely explained to the Prosecutors’ Office about the case. Upbit did not commit wash trading (cross trading), imaginary orders (provision of liquidity), or fraudulent trading. The company did not trade cypto-currencies which it didn’t own, or have its staff and employees benefit from such trading.”
The exchange emphasized that it did not benefit from the increase in the price of Bitcoin at the time as Upbit did not sell any Bitcoin and did not have any motive to push the price of the asset up.
“Upbit has not sold or bought cryptocurrency that it did not own, and employees and individuals of Upbit did not benefit during this process. This will be explained in-depth during trial. The amount of bitcoin and the total amount of sell-orders announced by the Prosecutors seems to be the accumulation of sell-orders only, while excluding the buy-orders in the transactions,” the company said.
Logically, Upbit, which is owned by one of the largest fintech companies in the country that is financed by Kakao, would not have the motive to generate minor short-term profits relative to its revenues generated from fees at the risk of endangering the public image of the company and Kakao that are worth tens of billions of dollars when put together.
But, the prosecutors believe that a select group of people within the company ran fraudulent operations to generate profits for themselves, independent of the company.
The investigation is still ongoing and the company is denying all allegations. In May, the prosecutors did not follow up on their search and seizure and were criticized by the public for it. It could be that the prosecutors have been planning for this investigation since then and has at last decided to go public with it.
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