SEOUL—Most of the hundreds of reward payouts were just a few bucks each, part of a promotional campaign by a South Korean cryptocurrency exchange. Total prize pot: 620,000 Korean Won, or about $425.
Bithumb is South Korea’s No. 2 crypto exchange.Then a big mistake happened. An employee of Bithumb, South Korea’s No. 2 crypto exchange, did not deliver 620,000 Korean won.
Rather, the input error caused the prizes to appear in a different currency: 620,000 bitcoins, worth more than $40 billion.
That means a winner who should have received 2,000 won—enough to buy a cheap coffee—at least momentarily, is worth more than $120 million in bitcoin.
Enough recipients wanted to sell or withdraw bitcoin that the market sank 17%, before Bithumb stopped trading after about 30 minutes. The victims included investors who held bitcoins before the dues were gifted. Damage totaled $685,000, Bithumb said.
The company has since said it has reversed transactions or voluntarily returned more than 99% of bitcoins to recipients. But Bithumb is still trying to convince users who managed to offload more than 100 bitcoins, worth about $9 million, to return the equivalent funds in the short trading window.
The debacle plunges Bithumb—a trusted name in one of the world’s most active retail crypto markets—into a self-inflicted crisis. Lawmakers have called for tougher laws. Local financial-market regulators say the gaffe exposed fundamental weaknesses in the country’s digital-assets industry.
The company has offered to cover the losses as well as other compensation to those who sold their bitcoins in an attempt to contain their losses. It has reduced trading fees this week for all assets. Bithumb has pledged to establish a permanent “customer protection fund” of roughly $70 million to protect users in the event of another mishap.
Bitcoin’s fraud-detection system does not appear to have been triggered, according to local cryptocurrency experts. Lawmakers in South Korea expressed concern over the so-called “phantom coin” issue: how Bithumb was able to distribute 620,000 bitcoins when its own reserves appeared to be closer to 50,000.
On Tuesday, South Korean financial regulators said they had opened a formal investigation into Bithumb. This could lead to possible fines or other penalties.
Bithumb is fully cooperating with the investigation and is constantly monitoring to avoid similar incidents, a company spokesperson said.
Cryptocurrency exchanges, by local law, cannot allow trading in excess of the actual supply of coins in their digital vaults. But that doesn’t appear to be the case with recent Bithumb operations, which represent a “catastrophic failure of internal control,” said Lee Jung-soo, who advises the South Korean government on digital-asset policy.
“It’s almost unbelievable for Korea’s second-largest exchange to have such a porous IT system,” said Lee, a law professor at Seoul National University, noting the lack of a strong monitoring system.
Accidental giveaways and losses of bitcoins are rare, especially on this scale. An IT worker in Wales lost about 7,500 bitcoins mined in 2009 when a hard drive was accidentally thrown away during an office cleanout. In 2021, now-bankrupt crypto lender BlockFi accidentally sent hundreds of bitcoins to some users, though it later recovered many of the funds.
Write to Timothy W. Martin at Timothy.Martin@wsj.com
