BitGo CEO Emphasizes Separation of Trading and Custody to Prevent Crypto Bankruptcies

South Korea: Crypto Exchange Execs Indicted on Manipulation ChargesA number of executives at Coinone, one of South Korea’s leading cryptocurrency exchanges, have been indicted on charges related to market manipulation.That’s according to a report published by South Korean news outlet, The JoongAng, on Monday. The complaint details no less than forty-six coins that are alleged to have been the subject of manipulation in some form. That represents one in four of the total number of coins that the exchange has enabled for trading on the platform.Photo by Burak The Weekender on PexelsFour executives indictedThe indictment lists four Coinone executives, Mr. Jeon, Mr. Kim, Mr. Ko, and Mr. Hwang. The four have been charged with employing illegal mechanisms to manipulate coin listings, resulting in the four executives profiting to the tune of 2.98 billion Korean Won, which amounts to $2.26 million dollars according to current fx exchange rates.The complaint specifies that these offenses were committed between December 2019 and November 2022. South Korean prosecutors further allege that prior to various projects obtaining a token listing on Coinone, company executives made them sign third-party market-making contracts. That in and of itself is not unusual.One of the key aspects of a new coin listing (and an ongoing listing for that matter), is the need to have sufficient liquidity in place to ensure that the coin can be traded without being susceptible to market manipulation. Low liquidity conditions open the door to bad actors moving the market relative to a particular token.Cross tradingThe indictment is far more specific in calling out illegal cross trading activity. It’s likely that these key Coinone employees would have been expecting such an indictment to land at their doors. Last week, it emerged that LUNA tokens associated with Terraform Labs’ failed Terra USD (TUSD) algorithmic stablecoin project, had been illegally cross traded on three South Korean crypto exchanges: Bithumb, GoPax and Coinone.Cross trading is the practice of trading an asset on an exchange without recording the transaction transparently on the exchange. Strictly speaking, the activity can be legitimate although most exchanges prohibit the practice as it can be used to affect market manipulation.A cross trade could be permitted in a scenario where the price is deemed to be competitive at the time that the trade takes place. While this can more easily be determined in conventional markets as the practice is covered by specific regulation, that’s not the case in most jurisdictions right now where digital asset trading is concerned. By extension, there’s a complete lack of transparency and a lack of reporting.As other market participants don’t have visibility of this type of trading activity, they are unaware as to whether a better price is available on the market or not. In an unregulated state, the practice undermines trust.In the case of Coinone, the executives enabled the practice in order to provide an illusion with regard to trading activity. That meant that trading volumes claimed were inaccurate, misleading ordinary traders and exchange users. Along with trading volume in these coins being artificially boosted, so too were token prices.In the indictment, prosecutors explicitly alleged that cross trading was being employed in an illegal manner:“This price manipulation causes misunderstandings about the trading volume and market price among general members of the exchange, and induces [service users] to participate in the coin transaction and buy the coin.”

The South Korean port city of Busan yesterday convened a meeting to reaffirm the city’s commitment to establishing a blockchain-specialized cluster in the region.  The meeting took place at the Busan Technology Innovation Center located in Busan International Financial Center (BIFC), attended by Busan Vice Mayor for Economic Affairs Kim Kwang-hee, the Korea Internet & Security Agency Director Lee Sang-joong, Busan Technopark Chairman Kim Hyung-gyun and representatives of companies stationed at the BIFC. Photo by Dane Kim on Unsplash$15 million investment by 2026In a bid to foster blockchain technology companies in the region, the local government has outlined plans to invest a total of KRW 20 billion, or over $15 million, in the blockchain cluster project for the next three years until 2026. The Busan government and the central government are each responsible for providing half of the project’s investment fund. Starting off, KRW 6.2 billion will be allocated this year. Among the project’s main objectives are identifying local startups with high potential for blockchain technology integration, facilitating their connections with VCs for fundraising and promoting the project’s achievements. Participating companies are set to share their annual performances this upcoming December.  Most importantly, the city aims to attract blockchain companies to the region, lay business foundations for them and transform the city into a blockchain industry hub.  Ambition to become a global blockchain hub Vice Mayor Kim said the city will keep supporting local blockchain startups so that these entrepreneurs can settle down in Busan, with the aim of turning the city into a global blockchain hub. 

Research Finds Over 90% of Korean Cryptos Prone to Pump-and-Dump SchemesThe Korea Institute of Finance (KIF) has released a report revealing that 91.3% of South Korean-issued cryptocurrencies, known as “kimchi coins,” are prone to pump-and-dump (P&D) schemes. These schemes involve intentionally spreading false information on social media platforms to manipulate token prices. This is done with the intention of selling the tokens at artificially inflated prices.Photo by Maxim Hopman on UnsplashP&D prevalenceThese manipulative practices were frequently observed during the rapid growth of the cryptocurrency market from 2020 to 2022. Previous research papers indicate that P&D schemes commonly occur on multiple crypto exchanges and typically unfold within a time frame of 10 minutes. It has been observed that cryptocurrencies with lower liquidity and smaller market capitalization are particularly vulnerable to becoming prime targets for these schemes.Korean market and global marketThe Korean cryptocurrency market stands out with its significant number of cryptocurrencies listed on a single exchange, including kimchi coins. This distinction becomes evident when comparing it to the global market. In the Korean market, the top 10 global cryptocurrencies, ranked by their market capitalization, account for 59% of the total market share. Meanwhile, in the global market, they represent 84.9%. This contrast indicates that the Korean market has a larger proportion of alternative coins, also known as altcoins, which are more susceptible to pump-and-dump schemes and other manipulative activities.According to a survey conducted by the Financial Services Commission in the second half of 2022, there were a total of 625 listed coins (excluding duplicate listings), with 389 (62.24%) of them being listed on a single exchange. Among these single-exchange listed cryptos, 223 were kimchi coins, which is equivalent to 57%.OHLCV data analysisIn this KIF paper, research analyst Baik Yeon-ju delved into abnormal price patterns within the Korean cryptocurrency market. She analyzed the hourly Open-High-Low-Close-Volume (OHLCV) data of kimchi coins in October 2021. The study revealed that out of a total of 16,560 hourly price and volume observations, approximately 4.7% exhibited characteristics consistent with P&D schemes. Baik noted that 91.3% (21 of the 23) observed kimchi coins witnessed such movements.Legislative effortsMeanwhile, it is encouraging that the South Korean National Assembly passed the Virtual Asset User Protection Bill during its plenary session on June 30. This legislation, set to go effective in July next year, aims to provide protection for customers’ assets in the virtual asset space. The act not only establishes regulations to combat unfair trading practices but also enforces penalties for non-compliance.Call for further measuresHowever, Baik suggested that policies should be further strengthened to enhance investor protection within the crypto market. In order to achieve this, she proposed the implementation of a monitoring system for virtual asset service operators (VASPs) and the allocation of inspection and investigation personnel, as well as technical resources. It is also necessary to address potential conflicts that may arise with the Act on Real Name Financial Transactions and Confidentiality, particularly if the data required from VASPs falls under the classification of financial transaction information and personal information.Furthermore, considering the lack of transparency surrounding many altcoins regarding their projects and exchange listings, Baik suggests that the upcoming second virtual asset bill should tackle this issue by regulating the issuance and disclosure of these cryptocurrencies. Additionally, she highlighted the importance of conducting research based on empirical data to detect abnormal transactions. This approach enables the recognition of existing issues and the acquisition of concrete evidence, which serves as a credible basis for policymakers to enact relevant legislation.