QUADRIGA INITIATIVE
CRYPTO WATCHDOG & FRAUD RECOVERY PLATFORM
A COMMUNITY-BASED, NOT-FOR-PROFIT
$940 000 USD
MARCH 2018
SOUTH KOREA
COINNEST
DESCRIPTION OF EVENTS
"Coinnest is a crypto-currency trading platform that supports transactions for various coins and provides crypto-currency market information."
"This South Korean cryptocurrency exchange launched in 2017." "Coinnest [was] once South Korea's third largest [cryptocurrency exchange]." "Coinnest [was] the country’s sixth largest exchange by trade volume, with around 500,000 registered users [in] January [2018]."
"Coinnest was one of three local exchanges raided by prosecutors in mid-March [of 2018], after “suspicious money transfers” between exchanges were detected during an audit by local financial regulators and intelligence services." "[T]he 2nd Financial Investigation Division of the Seoul Southern District Prosecutors' Office (Chief Prosecutor Jeong Dae-jeong) seized and searched three cryptocurrency exchanges in Yeouido for three days from the 12th of last month. At that time, Coinnest was also included in the search and seizure target." "Prosecutors obtained accounting-related data from these cryptocurrency exchanges and started analyzing them for 20 days." "It was during this process that the office of the prosecution stumbled upon information showing the alleged misconduct by the Coinnest CEO."
"Kim was one of the four executives taken in by Seoul police for questioning, according to local newspaper Hanguk Ilbo. It is believed the embezzled funds summed up to KRW1 billion (US$940,000)."
"The prosecution plans to request an arrest warrant for Kim and others from the court soon." "The Seoul Southern District Prosecutors' Office announced on the 5th that they had arrested Kim Ik-hwan, the CEO of Coinnest." "CoinNest co-founder and chief executive Kim Ik-hwan has been detained in Seoul and charged with embezzlement and fraud, alongside two senior executives and the head of a second unnamed crypto exchange, a local news outlet Naver reported April 5." "This is the first time any representative of a Korean digital currency exchange has been arrested."
"Prosecutors believe that they stole funds from cryptocurrency trading customers into accounts in the names of exchange representatives or executives." "The executives allegedly moved customers’ digital assets into their personal accounts, worth “billions of won,” according to prosecutors. Officials are now seeking arrest warrants for the detainees."
"[The] executive of the firm was arrested on suspicion of fraud and was later convicted, receiving a jail sentence and a 3 billion Korean won ($2.5 million) fine."
"The Korea Blockchain Association, a self-regulatory body for 33 local crypto exchanges, is following the investigation to determine whether to expel Coinnest from membership. The exchange opened in June last year, backed by Chinese investors such as Bitmain. Coinnest’s value is estimated at over 100 bln won."
"An announcement by Coinnest on Thursday stated that a “professional management system” has now been set up to “protect[…] customer assets and creat[e] a healthy trading environment.”"
"Coinnest is shutting up shop, citing a drop-off in trade." "The exchange posted a notice on its website saying that as of Tuesday it is no longer operating, adding that users will need to withdraw any funds held on its platform by April 30. The fees for withdrawals and the minimum threshold have been lowered to assist the process, it said."
"It is a natural result of a decrease in trading volume. Both regulatory issues and business decisions have served as a background for this decision."
"As of today, Coinnest is no longer accepting any new customers. The exchange is closing down its operations. Existing customers need to withdraw all their assets prior to 30 June 2019."
CoinNest was one of the major exchange platforms in South Korea, prior to the discovery that the CEO was stealing customer funds. The CEO was arrested and fined. The exchange shut down in April 2019, with users having to remove their assets by June 30th. There were no reports found of any customers not being able to retrieve their funds in the end.
HOW COULD THIS HAVE BEEN PREVENTED?
There were three major issues. The first was the lack of any background check on the executive team. The second was the way that funds were stored with the majority accessible to the CEO directly, rather than a multi-signature arrangement. Finally, and most importantly, there was a lack of accountability and vsibility to customers to be sure that their assets were fully backed on the platform.
Any one of these would have prevented the situation.
Korean Crypto Exchange Execs Detained On Fraud And Embezzlement Charges (Sep 19)
[단독] 검찰, 가상화폐거래소 코인네스트 대표 체포…횡령·사기 혐의 (Sep 19)
South Korea Detains Cryptocurrency Executives on Embezzlement Allegations - WSJ (Sep 19)
South Korean Prosecutors Raided Three Seoul-Based Crypto Exchanges Last Month (Sep 19)
Coinnest - Headquarter Locations, Competitors, Financials, Employees (Oct 4)
코인네스트 | 글로벌 시장을 선도하는 비트코인 거래소, Coinnest (Oct 4)
Coinnest exchange shuts down after series of embarrassing incidents - CoinGeek (Oct 4)
Coinnest co-founder arrested in South Korea on embezzlement charges - CoinGeek (Oct 4)
