Key Takeaways:
- The Korean central bank wants trade-halting protocols for crypto exchanges.
- This is driven by the Bithumb incident, where 620,000 ghost BTC was distributed.
- Implementation can increase operational costs for exchanges.
The Bank of Korea (BOK) has called for the introduction of a classic trading kill switch across all domestic digital asset exchanges. The requirement comes on the heels of Bithumb mistakenly transferring 620,000 Bitcoin (BTC) to its users.
Also known as a circuit breaker, this is in line with standard practices in traditional trading. Operators can forcefully halt trading if they detect any abnormal activities, including extreme volatility.
Crypto exchanges required to mitigate volatility
The BOK’s vision borrows directly from the Korea Exchange (KRX), which utilizes sophisticated algorithm-driven circuit breakers. These put a stop to trading when price fluctuations exceed established thresholds.
The breakers allow for automatic trading suspension when abnormal situations happen, such as flash crashes, hacks, or a run-off.
Reputable centralized crypto exchanges have different protection mechanisms. However, most of them are passive, such as manual intervention, rolling back trades, and even a compensation fund. But what the BOK suggests is counterintuitive in the crypto trading arena.
Cryptocurrencies are infamous for their volatility. While it makes it risky, the market swings enable traders to capture the price differences.
Learn More: Crypto Trading and Web3 Essentials: From On-Chain Tools to NFT Finance
BOK wants exchanges to match the balance with their wallets
In the case of Bithumb, winners of a competition were to be awarded 2,000 Korean won, or $1.40. However, an employee mistakenly entered BTC’s ticker in the system. The result was a distribution of 620,000 BTC.
The exchange did not have the distributed 620,000 Bitcoin in its wallets. Since Bithumb is a centralized exchange and runs its balance books separately from its wallet balances, the exchange simply added the numbers to users’ accounts. It took a good 20 minutes before the exchange realized the problem. By then, many users had withdrawn or sold off their BTC.
For this, the BOK has urged for a system that can track exchanges’ books and their wallets in real time, red-flagging any significant deviation automatically, even leading to suspension of trading.
Related: South Korea Fines Coinone $3.5M, Suspends New User Deposits for 3 Months
The move can become an investor trap
The BOK requirement is beneficial for consumer protection. However, when it comes to crypto trading, there are certain issues that need to be addressed.
A kill switch within a closed loop, such as KRX, is implementable because it suspends trading across the complete ecosystem. If implemented in domestic crypto exchanges, a sudden move will freeze trading, but only within the Korean limits.
The rest of the world will continue trading. If a crash occurs, Korean users will not be able to pull out their investments at all.
At the same time, a real-time ledger verification system can be a massive technical undertaking. This has the potential to drive up operational costs, which will eventually be passed on to users.
