2018 started off with Bitcoin being just over a week removed from its highest price-point ($19.6k) and market cap ($335.5 billion) ever up until late 2020. After a full year of an upward price trend, most new traders expected the price to continue going up.
Amidst the mania in the latter half of 2017 going into the next year were increasing reports that Korean lawmakers aimed to shut down crypto trading altogether inside the country. As those reports gained legitimacy, fears stirred among traders who came to rely heavily on the trade volume generated by South Korea and its FOMO-friendly populace. In mid-January, the Korean government did indeed make an announcement that negatively affected all aspects of cryptocurrency trading for the globe and which impacted domestic traders’ ability to engage in trading at all.
The government didn’t shut down exchanges as many expected them to. They didn’t follow in the footsteps of neighboring China just months before. Instead, they urged exchanges to voluntarily adhere to certain guidelines in order to prevent money laundering. The most impactful guideline was the requirement for all traders to open a real-name bank account at the particular bank that had partnered with their exchange of choice. For example, if you wanted to trade at Bithumb and withdraw your funds, you needed a real-name account at Shinhan Bank.
This sent immediate shockwaves around the crypto world. The new measures effectively, for the time being, prevented any new liquidity to be generated by the exchanges until traders could use their new bank accounts. Registering for these new accounts was no easy task, mind you. There was some breakdown in communication, far too common among Korean companies, where bank tellers largely had no idea about the regulatory changes. They were not prepared for the rush of traders who wanted their bank accounts established quickly during their lunch break. They also didn’t understand what exactly the new account holders wanted by specifically requesting the real-name accounts. As a result, it took months for most resident traders to establish their accounts and start injecting liquidity back into the exchanges. By February 6th, the price of Bitcoin had fallen to $6.5k.
The price of Bitcoin didn’t stop opportunists from making an attempt at steep profits.
Most people in the industry have heard of the big Korean exchanges like Bithumb, Upbit, Coinone, and Korbit, but most have no idea just how many exchanges called South Korea home. By 2018 there were 205 registered cryptocurrency exchanges according to Yonhap News – over 300 if you count the unregistered ones according to street-level reports.
That’s 205+ exchanges launching, offering a registration incentive such as an airdrop of the native token or an exclusive trading pair, and many committing fraud. With those exchanges came some dozens of hacks, apologies, promises to fix security, and second visits from other hackers. All of this is not to mention the non-Korean exchanges that attempted to open up a slice of the saturated Korean market for themselves as well.
This chapter is a story of cyber security, of how many standard deviations an industry can veer from the ideal of zero trust, and how capitalism reacts when people want to FOMO into something. There are all too many examples of the above ideas in motion – so many that it could take a whole other book to do it. South Korea quickly ripened in 2017 for such an exploitative pump for many of the factors that got the country into the Bitcoin Bubble in the first place and other factors that may shed some light on why the law makers needed to make abrupt changes to the country’s laws through 2018.
Cyber Security and Zero Trust
Cyber security at cryptocurrency exchanges is a touchy subject among traders. The exemplars of security maintain to this day a spotless history of cyber security excellence such as Binance, Coinbase, and Kraken. In a way, their reliable back-end development and security measures appear boring in their predictability compared to standards at other exchanges. On the other hand, some big global exchanges, even ones in the top 10 by trading volume, have decidedly very bad track records. As it turns out, two of those exchanges in mid-2020 when this chapter was written, were South Korean exchanges.
The top Korean exchange on contemporary top-by-volume lists and the most notorious among members of Crypto of Korea in 2017 and 2018 is Bithumb. Bithumb was launched in 2014 which might inspire confidence and bring with it the expectation that with 3 years of experience under its belt before the Bitcoin Bubble and Kimchi Premium became realities that the operators would have expertise in the field of cyber security. It seemed apparent by 2018 that the developers there had missed their security courses in school.
In mid-2017, Bithumb was hacked for an untold amount which they promised to reimburse to affected users. An official announcement stated that all affected users would receive vouchers for about $100 in credit on the exchange. That $100 amounted to an insult after the initial injury of the hack. In a way, it was a lesson that needs constant relearning: don’t leave your funds on exchanges for too long. Nobody knows when the next ‘hack’ will take place where all of your gains will be lost in a single click like with the MT.GOX fiasco just a few years earlier.
By November, Bithumb users had generally forgotten about the hack. After countless pumps between that mid-summer hack and November, few users other than maybe the biggest of whales who were still down were in a position to complain about the loss of funds. If they hadn’t caught any of those pumps by then, they probably weren’t regular traders anyway. November 2017 turned into one of those most unusual months in cryptocurrency trading, maybe only behind December and the following January.
It was in November, you may remember, that the EMC2 run had begun. At the time, Bithumb did not offer EMC2 for trading. Korean traders went to Upbit for that privilege. The reason for its distinction as such an unusual trading month comes from the price action of one of Derrick’s favorite coins: BCH. He was so enamored with the potential of a Bitcoin Cash upturn that he changed his name in the Crypto of Korea chat to ‘Hungry for BCash’ with BCash being pseudonym for Bitcoin Cash. Bithumb did offer BCH for trading on their platform at the time where they accounted for the majority of trading volume on the coin.
Bitcoin Cash was released as a hard fork of the Bitcoin blockchain in July 2017 by Roger Ver who, up to that point, had spent years speaking publicly about the accolades of blockchain and Bitcoin in terms of payments. His fork, Bitcoin Cash, offered what he saw as improvements to the Bitcoin Core blockchain which came complete with its very own coin – BCH. Upon its launch, the coin pumped to around $820/BCH. The launch pump itself isn’t the surprising part since, as illustrated earlier, listing and/or launch pumps were then and still are common practice.
Between very late July and December, BCH saw four new ATH prices. The first was the launch pump and dump, the second was in late August around $830, the third was in mid-November at around $1,350, and the fourth pushed BCH up to about $3,500. Those high points in November and later in December at the very peak of the bubble were propped up by Bithumb and Upbit respectively by virtue of the Kimchi Premium. The theme of 2017 trading was South Korea.
BCH
In light of those high points, one of them stands out to Koreans perhaps more than the others. Although incredulous newcomers to the cryptocurrency trading realm may have a hard time believing that BCH could reach the lofty peak in December of that year, what Bithumb did in November would turn many people off to trading altogether. BCH hit its November ATH on the 12th of that month. The Crypto of Korea chat was all abuzz about the price action on the coin in no small part due to Derrick’s rally cries, but certainly also because it had become one of the premier profitable coins to trade for a month. Rumors about Jihan Wu and Roger Ver conspiring to take down Bitcoin in something known as ‘the flippening’ where BCH would take over BTC as the dominant cryptocurrency on the market had taken traders by storm amidst the blizzard of pumps that were going on all around.
Through the Korean afternoon BCH price and trading volume increased as people placed orders in wild torrents to catch the wave. The price of one BCH was climbing from $700, already a fairly high mark but not eye-popping by any means. By around 3pm, the price point was strapped to the back of a rocket heading straight up. Orders flowed in so fast that Bithumb could not keep up with them. Price continued to rise up to around $1,350 – around 1.8 million KRW – until every single person in Crypto of Korea could not trade on Bithumb at all. Everyone using the app received the same error message while those trading on the browser saw nothing and were even redirected to another site.
By appearances, it seemed like a hack. A complete crash of the trading platform coupled with a suspicious redirect without any word from Bithumb HQ led us to believe some outside influence was pulling the strings that made BCH price fall just as quickly as it had risen. More suspicious were the results of the crash. Users had their buy orders filled but sell orders were not. Therefore, those who bought BCH at 2.8 million KRW could not sell to cut their losses. I ran to Bithumb HQ myself to try to get answers from a physical person by rushing into the building or remaining civil. The problem with that was I was late to the party. Although major English media at the time reported that protests had begun the next morning, (pardon the first-person, but this particular detail cannot be stressed enough) I can tell you because I was there that the early birds came out even before me and the police were well aware of the harm that had been done. By the time I got there, employees had already barricaded the entrance with their cars on the outside and planters and benches on the inside. Police sat watch around the corner. On top of that, employees smoked cigarettes in the parking lot without a care in the world. They saw me approach, so care returned to their senses and they scurried back inside.
How could a company that had higher trade volume than the largest stock exchange in South Korea, and a business that cleared hundreds of millions of dollars in 2017 and 2018 have such a hopelessly faulty platform with hardly a modicum of transparency? That is exactly the question over 3000 investors demanded the courts to ask of Bithumb the next day. In true Bithumb fashion, a representative served up lip service extra dry with a side of empty promises, hold the ethical responsibility. Bithumb still has not compensated users for the event. The exchange later stated that the issue was not a hack. For most companies, that would mean that they were taking responsibility for the problem and would offer some compensatory terms to users affected by yet another platform problem. No such offer was made. International folks commented that, there’s people talking about suing Bithumb and jokes about people who bought at 2800 jumping off into the Han river, but it was no joke. People had taken out loans in their name to the maximum and then borrowed against equity in their homes and taken out more loans in their parents’ names to have the funds to invest in cryptocurrency. Such a major dump left some people and their mothers in financial ruin.
Hopelessness, although a mental construct, is a powerful motivator.
Weeks later through the grapevine it came to light that employees had shut down the public platform so that they could fill orders themselves without interference from the tremendous volume rushing through the exchange at the time. That would explain the self-satisfied smoke break.
Not the kind of global coverage you want
The BCH issue happened in late 2017 during the peak FOMO period for cryptocurrency trading in the Bitcoin Bubble. One couldn’t possibly imagine a worse time for a ‘server outage’ to happen, but it happened nonetheless. Bithumb escaped the fiasco relatively unscathed which is an aspect that will be explored in greater depth later.
South Korean exchange hacks became the stuff of global news in 2018. Their reputation for reliability, honesty, and transparency were all at all-time lows due to the frequency and magnitude of the hacks. Bithumb itself would be yet hacked again later in 2018 to the tune of some $30 million, for example. These hacks, however, were merely the symptoms of larger problems. Those problems manifested themselves in the tacit expectation that exchanges would lose millions of dollars of investors’ funds without incurring any public wrath. Traders just accepted the fact that if they deposited fiat onto an exchange that it was virtually already gone.
An example of the malaise, or what some might consider disgust among traders in South Korea is the Coinrail hack episode.
Coinrail was a relatively small exchange clinging to a top-100 ranking on CoinMarketCap, coming in at 98th in May 2018. They offered only a small handful of trading pairs similar to how Bithumb and Upbit got their inauspicious beginnings in the crypto trading industry. While these days merely being in the top 100 of exchanges isn’t noteworthy if that position ranks in the bottom half of the list, there was still enough trade volume being reported back then to make it a respectable position especially for such a small operation.
In late May, Coinrail issued an official update to the terms of service with its users which stated that the exchange would not be held responsible for unintended negative consequences. Such a change to the terms of service, which users of course had no control over, would raise eyebrows if individuals ever actually read the terms of service. Business continued as usual at the exchange and among users of the platform.
On June 10th, just about 2 weeks after the new terms of service were issued, Redditors noticed extremely unusual withdrawals coming from Coinrail. Large amounts of Kyber, Storm, Tronix, B2B, NPER, Jibril, Aston X, NPXS, and Dent token were removed from the platform. The alleged attack took place at 2:10am Korea time during a period of low activity. It was almost as if someone was trying to sneak the hack in the wee hours of the morning while Koreans were still asleep. Assuredly over 90% of users were Korean, and the remaining 10% mostly resided in Korea so there is a very good chance that most of their users were asleep while the alleged attack took place. This also explains why Redditors were the first community to notice the coin movement since most Redditors are English-speaking folks in the west – they would have been wide awake at 2:10am Korea time.
The alarm raised by all netizens caused Bitcoin to crash over the next few days from about $7,500 on the 10th of June to just over $6k on the 13th. That’s a 20% drop in 3 days. Affected altcoins also dropped upwards of 30% at the time of the hack. The news was so important to the markets that Reuters and all the top blockchain and cryptocurrency news outlets covered the story at length.
TheNews.Asia covered the story with multiple updates including the very minute police visited Coinrail offices to raid their hard drives and pertinent documents. The contact who just happened to be there at the moment police came in reported to the news outlet that all bodies were ordered to sit still or stand where they were while collections took place. By this point, Seoul police had become accustomed to such raids as they had performed the same routine at CoinOne and Upbit shortly before Coinrail. All told, high-end estimates put the total losses at just under $40 million in stolen coins. It also rang the tired tune of weak security and lax regulations on a market that begged for government intervention.
The ‘F’ Word
Nightclubs often utilize an interesting business model. Many of the nightclubs in South Korea, for example, rely on VIP table renters and bottle purchasers to keep themselves above water. Entrance fee is charged as a mere barrier to entry to the super-cheap that the young see as the price for fun without factoring in the additional costs of the festivities inside. It is as youths are. The amount of liquor a club needs to sell to stay above water nightly, however, can be staggering.
Not every patron of a nightclub buys a bottle in part due to the dizzying premium the establishments put on the bottles and in part due to the fact that some people would like to forego the alcohol in order to just dance. Therefore, after a nightclub is no longer the hot new place, it becomes difficult for the owners to stay in business with their same old tricks.
This is where money laundering comes into play. Money laundering is where money that is earned through illicit means, such as through the drug trade, becomes legitimate income. A case from 2015 in the USA illustrates how this might work for a nightclub. The Mexican Cartel purchased a nightclub and made millions of dollars in purchases with their illicit drug money. They injected cash into the club’s revenue daily to both boost the sales receipts of the club and to make their money easy to withdraw.
More than 500 people checked in to the club via social media while the Cartel owned it which made it seem as if there were real sales being made. Sales were up, albeit a larger portion in cash, and the place seemed quite popular. To a layperson, it would seem that the nightclub was a hot place to visit. The club’s bank started to notice suspicious regular cash deposits that were designed to evade cash-deposit limits which triggered a red flag. Eventually, the authorities caught on to the scheme and shut down the nightclub.
In the same fashion with the nightclub in the USA, exchanges didn’t appear to have any trouble at all onboarding traders and growing their liquidity and trade volume since those metrics along with coin prices were at ever-increasing ATH. The Korean market itself accounted for more than 30% of average global trade volume with that percentage being far higher on a few select coins.
When the bubble burst after the shockwave caused by the Korean government’s bombshell decision to start regulating crypto trading, one would expect the trading volume to retract in some reasonable proportion. Through 2018, however, trading volume on Korean exchange remained relatively high, certainly higher than the global average. That isn’t to say that trading volume was still in the millions of transactions per day as it was through the end of 2017, it was still significantly down, but not down enough to match what would be expected when Korea’s closed ecosystem was effectively temporarily shut down.
In the time through 2018, reports and accusations of wash trading and fraud grew in number from several of the country’s largest exchanges. Couple that with suspicious hacks of millions of dollars at several other exchanges and it became apparent that there was something seriously wrong with the cryptocurrency investment market in South Korea. That specific problem was fraud and wash trading as noted by the Blockchain Transparency Institute (BTI) when they reported in late 2018 that, “…Over 80% of the CMC top 25 BTC pairs volume is wash traded. These exchanges continue to use these strategies as a business model to steal money from aspiring token projects.” The observation notes that there were problems across the entire cryptocurrency trading world, not just Korea as they further revealed that over 50 exchanges were wash trading 95% of their volumes.
The majority of Bithumb’s trade volume on some popular coins was found to be wash traded in order to keep appearances up. The Blockchain Transparency Institute took notice of the unusual volumes on the exchange and stated that a large amount of wash trading on Dash, Bitcoin Gold, Monero, and ZCash was found on the platform. The latter two coins are privacy coins whose transactions cannot be tracked when transferred off of a centralized platform, making them ideal for money launderers.
Spot traders noticed the unusual trade activity on Bithumb with those privacy coins especially. In interviews, subjects commonly observed that volume would all but diminish to zero on those trading pairs during the Korean nighttime hours only to resume to the same level around mid-morning.
Upbit came under the scrutiny of law enforcement several times through 2018 for separate charges of fraud. They were raided by police and executives were sent to the central courthouse for questioning about various schemes. The first instance came in mid-2018 when authorities performed search and seizure on pertinent documents at Upbit headquarters. Upbit came under charges of fraud then for allegedly transferring funds from customer accounts to a separate account thought to belong to an executive at Upbit. The exchange was acquitted of those charges and made no genuine apology to the effect.
Later in the same year, they were accused and later acquitted of unlawfully using bots to manipulate trading volumes on certain trading pairs on their platform to inflate the amount of real transactions being executed. This bot scheme is basically the same thing that Bithumb and dozens of other exchanges in Korea and hundreds worldwide used then and still use through 2020 in order to create pumps and FOMO. In the case of Upbit, however, authorities alleged that the scheme took place for two months in late 2017 of all times. It raised questions about why a Korean exchange would need to fabricate transactions at all in the midst of the largest bull-run ever to-date.
Later Upbit admitted to using bots in order to manipulate trade volume. Their defense was that they needed to manipulate the volume in order to protect investors from token values from crashing due to a complete lack of volume. In their statement, Upbit claimed that the amount of fraudulent transactions and any other allegations against them were “[misunderstandings]” which would be cleared up in their time in court. The way Koreans use the word ‘misunderstanding’ in Korean and English are similar in the sense that they believe it is a catch-all term meant to admit guilt, excuse responsibility, and force other parties to move on all at the same time.
One tends to believe that where there is smoke, there is fire. Upbit curiously escaped a day to stand before a jury to have judgment laid on them. The executives of Komid, an abysmal, tiny Korean exchange did not escape that fate. They are still in prison in 2020 for their parts in a scheme to fabricate trade volume on their exchange in order to attract more investors. They should have said it was a misunderstanding. More recently, executives from Upbit and its parent company, Dunamu, have had to explain to superior Korean Courts that their case is different from Komid’s because Komid used fake money to defraud users – Upbit used their own assets to defraud users. That case will soon reach Korea’s Supreme Court.
The apparent solution to these problems was government regulations which protected people from both scammers and themselves in any other investment category thinkable. With those regulations inevitably would come taxation which many with poor hindsight and even poorer foresight decried as unnecessary. They didn’t realize then that they paid more for the hacks on their favorite trading platforms than they would if they paid taxes for government protections in the first place. The next step was getting the Korean government to make up their mind about how they planned on regulating the exchanges running amok around the country.
We can see that 2018 would turn out to be a dark time for crypto traders ironically due to the light shed on the underpinnings of the industry after the massive bubble burst. One interviewee for candidly recalled 2018 as the worst year of his life. He revealed something of a vivid moment of clarity he felt while standing on a street corner looking at his account balances in dollar value. Bearing in mind that each time an exchange got hacked, the price of cryptos fell more sharply, one cannot excuse the instances of hacks, fraud, and other malfeasance as isolated instances.
No cries of foul could be heard over the frenzied profit takers in 2017. That vocal minority of profit takers would largely retreat into comfort, leaving the vast disgruntled masses asking how and why their position was so insignificant.
