South Korea FSC Approves Digital Asset Protection Initiative

• South Korea’s FSC greenlights new foundation to secure and refund assets from defunct crypto exchanges starting October.
• 10 out of 22 crypto exchanges in South Korea have shut, prompting the launch of a protective foundation for users’ assets.
• The Digital Asset User Protection Foundation will partner with banks and KRW-based providers to manage and return users’ funds.

South Korea’s Financial Services Commission has approved the creation of the Digital Asset User Protection Foundation. This effort focuses on refunding and protecting funds taken from no longer functional cryptocurrency exchanges. Set to commence in October, this foundation represents a crucial step in reinforcing consumer protection within the burgeoning digital asset marketplace.

Foundation’s Role and Structure

The foundation, proposed by the Digital Asset Exchange Joint Consultative Group (DAXA), a self-regulatory body, aims to provide a systematic mechanism to manage and return users’ virtual assets and funds from non-operational exchanges. Concerns have been raised regarding the substantial number of cryptocurrency exchanges that have shut down or suspended services, affecting the security of users’ investments. According to the FSC, out of 22 recognized exchanges in South Korea, 10 have closed down, and three have paused their operations, underscoring the need for a dedicated entity to handle asset recovery.

The foundation’s process involves a collaborative approach with the remaining functional exchanges. Virtual assets held by the nonfunctioning exchanges will be transferred to the foundation, which will then appoint a bank to manage the cash holdings and a KRW-based exchange service provider to handle the virtual assets. Users will be informed of the return process, ensuring transparency and security in asset recovery.

Government Support and Regulatory Framework

The South Korean government is backing this initiative robustly, with plans to facilitate consultations and guide future defunct exchanges to transfer their customers’ assets to the foundation. This move aligns with the broader goals of the Virtual Asset User Protection Act, enacted on July 19, which mandates that exchanges maintain customer deposits distinctly in banks and separate customer virtual assets from their operational assets.

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The FSC has been proactive in addressing the vulnerabilities in the digital asset market by setting up a framework that protects consumers and stabilizes the financial ecosystem. The foundation will include an operating committee comprising representatives from the bank, exchange service providers, government agencies, and private sector experts, all working together to ensure the diligent management and return of user assets.