[Executive Summary]

• The Seoul High Court ruled that Bithumb has failed to fulfill its obligations to maintain the stability of its server and to provide transaction services to its users. The court judged that Bithumb must compensate damages to users who claim to have suffered financial loss during Bithumb’s temporary server failure in 2017. The Court recognized the users’ financial loss that occurred due to the temporary network failure and stated that virtual assets exchanges need to maintain a level of system safety and stability that is equivalent to that of a stock exchange.

The 16th Civil Division of the Seoul High Court overturned the first ruling of the district court and ruled that Bithumb, a Korean virtual asset exchange, must compensate damages to users who suffered losses during Bithumb’s server failure in 2017. The Court ordered Bithumb to pay a total of 251.38 million KRW to 132 of the plaintiffs.

On November 11th, 2017, Bithumb experienced an overload in its server network as the number of transaction orders doubled compared to usual. As a result, Bithumb temporarily suspended the entire service, and the transactions were resumed after an hour and 30 minutes of server maintenance, memory reset, and input traffic control.

Many users filed a lawsuit against Bithumb, claiming that they had suffered financial loss from the difference in market prices of virtual assets before and after the temporary suspension of transactions, as the market prices of some virtual assets such as BCH and ETC plummeted during the time.

The Court stated that Bithumb failed to fulfill its obligations to provide transaction services to those who concluded contracts with Bithumb by registering as a member and agreeing to Bithumb’s Terms of Service. The Court also stated that Bithumb has obligations to have established appropriate and reliable infrastructures and systems for operating a virtual assets trading website, as well as maintaining and repairing them if need be. Therefore, the Court ruled that Bithumb failed to perform its obligations by failing to provide transaction services to the plaintiffs and that it needs to compensate for damages that were caused by the company’s network failure.

“It seems that although Bithumb could have predicted an overload of its DB server as access requests to its website and number of transaction orders skyrocketed, it did not take any actions, in particular, to resolve the system overload until the network failure eventually occurred. Bithumb did not take appropriate measures, even though it had to prepare various countermeasures for server overloads according to risk management manual,” the Court added.

Furthermore, “Even if Bithumb is not regulated as an ‘electronic financial business entity’ under the Electronic Financial Transactions Act, this does not mean that the standards for safety and stability of a virtual assets exchange system can be lax, compared to those of a stock exchange system,” the Court continued. “It seems more reasonable for users to expect a level of system safety and stability that conforms to or better than the level of stability of a stock exchange from virtual assets exchange.”

The Court has set a precedent by ruling in favor of the investors who claimed to have suffered financial loss equivalent to the difference in the virtual asset’s market prices before and after the temporary server failure. Market participants, especially service providers and related businesses, are recommended to take the ruling as a reference to analyze their policies and systems to ensure they will not be put in a similar situation.