South Korea’s second-largest cryptocurrency exchange, Bithumb, has revealed how internal system failures led to the accidental distribution of more than $40bn in bitcoin during a promotional event last week – an error that triggered a 17% drop in bitcoin’s price.

The incident occurred on 6 February, when an employee (probably not of the month) mistakenly entered prize amounts in bitcoin rather than Korean won during a “random box” promotion.

The exchange had planned to distribute a total of 620,000 won (around $423) in prizes to 695 qualifying customers, but instead credited accounts with 620,000 bitcoins – equivalent to roughly $42bn. Of those eligible, 249 opened their prize boxes and received their reward, amounting to around 14 times more bitcoin than Bithumb itself owns.

Bithumb later disclosed that significant internal system vulnerabilities had contributed to the mistake and admitted these weaknesses could also have left its systems open to potential sabotage. Speaking before a parliamentary committee investigating the incident, Bithumb CEO Lee Jae-won said the accidental giveaway represented 15 times the exchange’s total holdings of 42,000 bitcoins.

He attributed the error partly to a delay of around 24 hours in processing transactions, which prevented timely updates to virtual asset balances. Mr Lee told lawmakers: “We are acutely aware of the deficiency in internal system control.”

He also revealed that the exchange’s established policy for verifying transfer volumes against actual holdings had failed, and that the substantial amount had not been placed in a separate account – a key safeguard designed to ensure transaction security.

Bithumb said it corrected 99.7% of the erroneous credits by reversing internal ledger entries and issued an apology.

However, regulators said that 1,786 bitcoins had already been sold within minutes before the exchange froze the affected accounts. Financial authorities later confirmed that 86 customers sold about 1,788 bitcoins in the 35 minutes before the freeze (which totals to around £119.4m if going by the value of Bitcoin as I write), triggering a brief price drop on Bithumb’s platform.

Some of the proceeds were withdrawn to personal bank accounts, while some were used to buy other cryptocurrencies.

The exchange said that about 13bn won ($9m) remained unrecovered after some recipients sold or withdrew the funds before the error was detected. It is now holding what it described as “one-on-one persuasion” talks with roughly 80 customers who cashed out, asking them to return the won equivalent voluntarily.

Regulators have said those who sold the bitcoin are legally required to return it.

Lee Chan-jin, governor of South Korea’s Financial Supervisory Service (FSS), described the situation as “catastrophic” for customers who sold the Bitcoin they received. Bitcoin prices have risen since Friday, meaning any customers required to return cryptocurrency could now face losses. Lee added that the incident exposed “structural problems” in how exchanges operate internal ledger systems.

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Bithumb has sought to reassure customers, saying in its apology: “Bithumb takes this incident very seriously and will do its utmost to prevent recurrence by redesigning the entire asset payment process and enhancing the internal control system.

“We want to make it clear that this incident is unrelated to any external hacking or security breach, and does not pose any issues with system security or customer asset management.”

South Korea introduced the Virtual Asset User Protection Act in July 2024 following a market rout in 2022 triggered by the collapse of cryptocurrencies terraUSD and luna. The government is now preparing another bill aimed at widening regulatory control over digital assets, while policymakers and lawmakers are also holding discussions on won-denominated stablecoins.