Suspected of Making Money through Fake Deals
The operators of cryptocurrency exchange Upbit were brought to trial on charges of earning about 150 billion won (US$133.7 million) through fake virtual currency transactions, the prosecution announced on Dec. 21.
The announcement sent shock waves through the cryptocurrency community as Upbit is the largest virtual currency exchange in Korea.
The Seoul Southern District Public Prosecutors' Office indicted three Upbit officials, including the chairman of the Upbit board and its chief financial officer.
According to the prosecution, the three officials made a bogus membership account between September and November last year and manipulated its computer system to make the account look as if it had a balance of 122.1 billion won (US$108.9 million). The ID of the account was the number ‘8.’
They placed 254 trillion won worth of false orders and made fake transactions worth 4.2 trillion won in order to make the exchange look as if it were booming with currency trading and to raise the prices of cryptocurrencies higher than those at other exchanges.
The fake account holder directly engaged in trading of 35 kinds of virtual currency, inflating the volume of transactions by buying and selling virtual currencies by itself and placing false orders that are unlikely to be concluded as the offered prices were far removed from the current prices. The purpose of these spurious deals was to lure actual investors into trading.
The amount of transactions that the fake account holder made with actual exchange members was estimated at 1.882 trillion won. However because bitcoin price was on the rise at that time and Uptbit was making huge amount of commission revenue, the exchange did not face a situation where it could not meet customer withdrawals.
Prosecutors believe that the Upbit operators used a bot program to inflate the price of Bitcoin. The computer program automatically places orders for Bitcoin until the price of the cryptocurrency goes higher than those in other exchanges.
After boosting the Bitcoin price, the fake account holder sold 11,500 Bitcoins to 26,000 members, earning 149.1 billion won.
Prosecutors launched an investigation into Upbit in May this year as it detected illegal acts at the exchange in the process of investigating other smaller virtual currency exchanges. They raided Upbit office and secured evidence of fraud from a notebook used by the head of the quant team, including documents containing a market manipulation scheme and a bot program used for manipulating Bitcoin prices.
The prosecution said it decided to indict the Upbit officials without detention considering the fact that there was no real insolvency and that the exchange is in normal operation now.
"At virtual currency exchanges, transactions are made through computers without the movement of real assets, so the members cannot confirm whether the other party actually has assets," the prosecution said. "We need to come up with measures to ensure fairness and transparency, such as prohibiting exchange operators from engaging in transactions."
On the other hand, Upbit denied the charges filed by the prosecution. "There were no fake transactions and false orders," Upbit said, adding, "The exchange has never made transactions of virtual currencies that were not held and neither the company nor its employees made any profits in the process."