The Financial Supervisory Service (FSS) of South Korea has joined the investigation into the country’s largest cryptocurrency exchange UPbit. FSS will assist the Korean Financial Intelligence Unit (KIU) and Financial Services Commission (FSC) in evaluating the balance sheet of UPbit and existing regulations on cryptocurrency exchanges. Liquidity IssueEarlier this week, CNBC’s Ran Neuner reported that an insider source within UPbit disclosed the investigation has found a liquidity issue in UPbit and that UPbit will likely remain uncharged for criminal or illicit activities.”The irregularity being investigated is in regards to liquidity issue. The issue involves sharing/ pooling liquidity with other exchanges. It seems to be that the regulators did not understand the share liquidity. My source (an employee) claims there is no issue,” said Ran. On May 13, the FSS stated that it has officially formed a task force to investigate irregular and illegal practices of cryptocurrency exchanges within the South Korean cryptocurrency market. FSS will contribute to the investigation into UPbit and continue to explore issues surrounding existing exchanges that may have deceived investors by pretending to own cryptocurrencies or funds deposited to the exchange. In the case of UPbit, the cryptocurrency community of South Korea generally believes that UPbit should not have had the motivation to carry out illicit operations purposely to generate more revenues, as it was already generating hundreds of millions of dollars on a quarterly basis. Hence, as Ran noted, local analysts currently foresee the investigation into UPbit ending with a simple warning to prevent sharing liquidity with other exchanges. Prompted by the recent investigation into UPbit, FSS along with local financial authorities will begin dealing with suspicious activities and operations in the cryptocurrency market in a swift manner with a dedicated department within the FSS tasked to research and investigate into the cryptocurrency market. In a press conference, FSS emphasized that it is not legal for cryptocurrency exchanges to inflate their holdings in cryptocurrencies and exchanges are not permitted to process trades or transactions on behalf of clients without actually moving the funds. In essence, the FSS explained that an exchange is not allowed to claim it has moved the funds of its clients unless the funds in cryptocurrencies are actually broadcasted to the blockchain network and officially transferred. Which means, if an exchange like UPbit or Bithumb claims to have more than $6 billion of client funds, the exchanges must be able to prove through audit reports that they, in fact, hold $6 billion. Bithumb’s TransparencyBithumb is the second largest cryptocurrency exchange in South Korea and it is also the only exchange in the world that is listed in a public stock market. As such, it is possible for anyone to see its audit reports and total holdings. As of December 2017, Bithumb held more than $6 billion in client funds. For private exchanges like UPbit, those numbers are not released, and the FSS could require exchanges to share the audit reports in the future, at least with the local financial authorities and government agencies. Featured image from Shutterstock