$85 000 000 USD
DESCRIPTION OF EVENTS
"Coinbit is a reliable virtual asset exchange." "Office : 33, Bongeunsa-ro 68-gil, Gangnam-gu, Seoul|CEO HyeonBaek Park|Business Registration Number 120-87-79307" "We ask for your reference in using it, and Coinbit will become an exchange that we create together with our members. Thank you." "It is operated by the company Axia Inc. with its head quarters in Seoul. The CEO is HyunBaek Park. The platform is available in Korean, Japanese, Chinese and English."
"Registered in one of the leading countries in the cryptocurrency trading world, South Korea, Coinbit is relatively new to the scene. Launched in July 2018, Coinbit claims to be the “most reliable cryptocurrency exchange”, as displayed on the homepage of its website. It prides itself on its "secure, convenient, swift and exciting nature” which boasts innovative benefits and events alongside its trading features. It is a member only platform, hence users will need to register in order to be able to trade on Coinbit, the process of which has been carefully explained on the homepage."
"Coinbit's TF team uses an abnormal transaction detection system (FDS) built in-house to protect customer assets, monitoring abnormal transactions 24 hours a day and deposits/withdrawals, and accumulates a database based on this to self-filter We have developed an algorithm and, in the event of an unusual occurrence, we work closely with the financial institutions and investigative agencies in charge to respond immediately. As a result, since the second half of 2018, there have been 0 cases of damage caused by voice phishing of Coinbit, and 0 cases of cryptocurrency withdrawals due to voice phishing have also been recorded. Coinbit promises to provide safe transactions by prioritizing customer asset protection, and we ask that you do not even attempt voice phishing through Coinbit as there will be no withdrawals due to voice phishing within Coinbit in the future."
"To provide enhanced security, Coinbit uses the KT Cloud System to “provide a stable trading environment”. Though Coinbit claims to be the most secure and transparent exchange out there, there isn’t any further information about its security system or the people behind the exchange."
"On the 26th [of August 2020], the police raided and raided Coinbit, a large domestic cryptocurrency exchange, on suspicion of fraud. Coinbit is the third largest exchange in Korea, following Bithumb (4,114,800) and Upbit (3667,000), with an average number of users of 2.5 million over the past three months (May-July)."
"South Korea’s third largest digital currency exchange, Coinbit, was seized and investigated by South Korean police. Its chairman and operator were suspected of internal transactions and manipulation of market prices. The police claimed that the company was suspected of using illegal means to earn at least 100 billion won in illegal profits (approximately 85 million US dollars), and Coinbit was also suspected of forging more than 99% of its transaction volume."
"The police said that the three allegedly used ghost accounts from August 2019 to May 2020 to inflate transaction volumes and manipulate token prices on the exchange." "The police searched and confiscated a number of properties associated with Coinbit in a series of August raids. At that time, authorities estimated that 99% of the exchange's volume had been faked by wash trading Bitcoin (BTC) and other cryptocurrencies and that those responsible for the exchange’s fraudulent activities had netted more than $84 million."
"Coinbit was divided into Exchange 1, which trades major coins, and Exchange 2, which mainly lists and sells new cryptocurrencies. In particular, Exchange 2 was a 'gaduri exchange' that blocked deposit and withdrawal accounts so that coin transactions with external exchanges were not possible, so Chairman Choi and the management team were able to control the supply of coins. In this way, it was found that Chairman Choi directly realized a profit in the market price by buying and selling a large amount of new coins listed at specific times."
"Police have charged Coinbit chairman Choi Mo and two unnamed executives with fraud and forgery related to market manipulation and prosecutors are preparing the case." "[A]n ex-employee alleges the exchange’s “violent” CEO assaulted staff, and extorted and threatened employees."
"Wash trading enables newly formed exchanges to gain a large market share within a few months, and this has become a lucrative shortcut to marketing success for many young exchanges. For example, in the case of Coinbit, the exchange is accused of using multiple “ghost accounts” to inflate trading volume. According to estimates, up to 99% of Coinbit’s trading volume is said to have been manipulated between August 2019 to May 2020, which resulted in “unfair profits” of about US$84 million equivalent."
"According to Thomas Reuters Practical Law, engaging in fraud in South Korea using unfair trading practices such as providing inaccurate market prices can result in a prison term from anywhere between five years to life if profits gained through the fraud are more than 5 billion KRW — roughly $4.6 million at the time of writing. In addition, the guilty parties can be fined “up to the amount of profit gained.”"
"[T]he exchange is now facing a fresh round of allegations involving the company’s de facto CEO, a 48-year-old man surnamed Choi." "According to Seoul Shinmun, Choi (first name withheld for legal reasons) is legally listed as a member of Coinbit’s advisory board – but in fact runs the firm on a day-to-day basis." "A man claiming to be a former Coinbit staff member has claimed that Choi threatened to “kill” and “cut off” the “arms and legs” of staff members who did not obey his commands – and attacked employees with a glass bottle." "One employee was allegedly left with cuts and bruises to the head after one of Choi’s most violent flare-ups."
"Choi also allegedly claimed to be a “gangster” who had underworld crime links, and stated that he would call in his mob connections on employees who did not toe to the line." "In one graphic outburst, Choi allegedly threatened to grind an employee’s body to a pulp with a meat grinder and throw the remains into a sewer." "Other people claiming to be ex-employees told the newspaper that they were repeatedly hit with glass bottles and forced to hand over huge sums of cash to Choi." "Choi reportedly extorted cash from several members of staff, forcing them to sign documents stating they would not reveal details about his behavior to the police."
"He also allegedly ordered staff to carry out “insider trades,” insisting that there were no rules to prevent such activities."
"The newspaper quotes a lawyer representing one or more of the ex-employees as stating that they informed police of the incidents on August 25 – the day before the Coinbit offices were raided."
"Police say the incident took place in February this year, when Choi discovered that an employee, named by the authorities only as B, had been trading on the exchange platform. Although the exchange reportedly had no policy preventing employees from opening accounts on the platform, the CEO believed B may have been using insider information to make personal gains."
"Police say that Choi refused to let B leave the company building for 10 hours, threatening B and eventually attacking B with his fists. Choi eventually succeeded in forcing B to transfer some USD 17,000 worth of funds to the exchange."
"Choi, say police, also made threats of violence to another two employees he also suspected of insider trading, coercing them to hand over several thousand dollars worth of fiat and cryptocurrencies."
"Coinbit remarked the police action as “unreasonable investigation” and denied the allegations. A Coinbit official said that many of the charges “were inflated during the investigation process.”"
"A Coinbit spokesperson told CoinDesk that none of its executives had been charged with fraud and that the wash trading had been carried out by former staff who were reported to the police and are now facing fraud charges." "Coinbit exchange executives denied the allegations at the time, saying that rogue employees acted under their own steam and claiming to have reported these individuals to the police, although the arrests of Choi and his executive team would suggest that police are not satisfied with these claims."
“Coinbit is working hard to cooperate with the [police] investigation and will actively clarify any misunderstandings and untruths.”
"Coinbit has not committed any illegal acts so far and has not been suspended by this time. No one, including Coinbit’s chairman, has been indicted or seized by the police on fraud charges. This case was a personal crime committed by some employees who had joined the company for their financial interests."
"According to Newspim, the 5th Investigation Team of the Seoul Metropolitan Police Agency made the official announcement. The same local media outlet quoted the country’s prosecutors, who are preparing themselves for the case, as they believe the executives participated in market manipulation “on multiple occasions.”"
"According to financial industry sources, an unidentified local bank has recently finalized internal procedures to open bank accounts for traders with Coinbit after deliberating several candidates for crypto partner."
"Coinbit used to serve nearly one million users but the number of users has been shaved to below 100,000 as it had to suspend won-based trade at the end of September after failing to find a bank to service accounts after verifying identification of the users under the new and stricter anti-money laundering regulations."
"Coinbit announced on Feb. 16 that it will launch its Crypto Linked Service for the first time in Korea."
"Coinbit’s Crypto Linked Service is a technically principal-guaranteed product that allows its users to purchase Bitcoin at its current price only at a transaction fee of 2%."
Coinbit was a platform which was allegedly run by Choi, with reports of violently assaulting other staff, stealing from staff through extortion, and self-professing to have underworld gangster crime connections. There were two other executives who were unnamed and supposedly involved, however it's unclear the level of role they played. Allegedly, $85m in profit was made through wash trading, however it's unclear where or how the value of $85m comes about, and whether this resulted in a loss to users of the platform. Coinbit was organized into two exchanges, and the $85m happened on the second platform for smaller alt coins with no visibility in fund backing nor ability for users to withdraw their funds.
It seems that the platform is continuing to operate in a diminished capacity without Choi, however Twitter is offline.
HOW COULD THIS HAVE BEEN PREVENTED?
Coinbit operated without any visibility or oversight. The fundamental failure of Coinbit was to place a single individual in a leadership role without any form of background check. A proper multi-signature setup does not have one individual in a leadership role. Redundancy is built in, so Choi could easily be removed. The platform should have transparency into the backing of all funds.
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