South Korea’s Upbit to Secure 99% of Assets in Cold Storage After Hack

TLDR

• Upbit will raise its cold wallet storage ratio to 99% after the $31M Solana hack.
• The exchange aims to reduce hot wallet holdings below 1%, exceeding industry standards.
• Upbit’s cold storage ratio surpasses other global exchanges like Coinbase and Kraken.
• Liquidity concerns grow in South Korea’s closed market due to limited arbitrage opportunities.

South Korea’s largest cryptocurrency exchange, Upbit, has announced plans to raise its cold wallet storage ratio to 99%. This move follows a major security breach in which hackers stole $31 million worth of Solana-based assets from the exchange on November 27. The decision is part of a broader security overhaul by Upbit to protect user funds and restore confidence in its platform.

Currently, Upbit stores 98.33% of customer assets in cold wallets, which are offline and considered more secure. The company aims to reduce its hot wallet holdings—funds stored in online wallets for easier access—for the first time to less than 1%. This would place the exchange ahead of both local and global industry standards, setting a new benchmark for security in the cryptocurrency space.

Cold Wallet Strategy Surpasses Regulatory Requirements

South Korea’s regulations require cryptocurrency exchanges to store at least 80% of their customers’ assets in cold wallets. Upbit’s goal of storing 99% of assets in cold storage not only surpasses the legal requirement but also significantly outpaces its domestic competitors. Data from South Korea’s Virtual Asset User Protection Act show that other exchanges in the country have cold wallet ratios ranging from 82% to 90%.

Upbit’s target of maintaining below 1% in hot wallets would be the lowest among domestic exchanges. For comparison, major international exchanges like Coinbase and Kraken store 95-98% of their customer funds in cold wallets, making Upbit’s target even more impressive. This shift is seen as a response to the $31 million hack, emphasizing the company’s commitment to asset protection and security.

Security Overhaul Following Hack of Solana-based Assets

The hack on November 27 targeted 24 Solana-based tokens, draining assets from Upbit’s hot wallet in less than an hour. It was the second major hack on the exchange, following a 2019 attack in which North Korean hackers stole 342,000 ETH from Upbit’s hot wallet. In response to the recent incident, the exchange has completed a full overhaul of its wallet infrastructure, focusing on enhancing security measures for its users.

Upbit has stated that all the losses from the hack will be covered by its reserves, ensuring that users are not affected financially. As part of its security strategy, the company is also working on advanced predictive modeling and automated systems to safeguard its assets. Despite these efforts, the move to increase cold wallet storage raises questions about liquidity in South Korea’s tightly regulated cryptocurrency market.

Liquidity Concerns Amid Market Constraints

While Upbit’s security improvements are designed to prevent future breaches, there are concerns about the potential downsides of limiting the exchange’s hot wallet reserves to below 1%. South Korea’s cryptocurrency market operates under strict regulations that require exchanges to have real-name bank accounts and restrict foreign participation. This has led to a situation where local prices often differ from global market rates, a phenomenon known as the “Kimchi premium.”

Minimizing hot wallet reserves could delay withdrawals during periods of high market volatility, as seen when Upbit suspended withdrawals after the recent hack. In such instances, liquidity can be trapped on the exchange, exacerbating market inefficiencies.

This could become particularly problematic if investors seek to move assets offshore to take advantage of price discrepancies. Despite this, Upbit maintains that its security systems are optimized for daily operations and assures users that any delays during extreme conditions would be minimal.

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