South Korea establishes Digital Asset Protection Foundation to ensure worry-free refund of funds for users in case of exchange collapse.

The Financial Services Commission (FSC) of South Korea approved the establishment of the Digital Asset Exchange Association (DAXA) "Digital Asset Protection Foundation" on September 26, 2024, to address the issue of returning funds trapped in defunct cryptocurrency exchanges. The foundation is expected to start operations in October 2024. Source

Severe Issues with Shutdown of Cryptocurrency Exchanges in South Korea

The Financial Services Commission (FSC) stated that out of the 22 cryptocurrency exchanges in South Korea, 10 have ceased operations, with 3 temporarily suspended, leaving users unable to retrieve their digital assets.

Establishment of Foundation by Operators for Negotiations with Closed Exchanges

In response, DAXA has pushed for the establishment of a nonprofit "Digital Asset Protection Foundation" to negotiate with closed exchanges. The foundation will be responsible for receiving and returning user funds and crypto assets transferred from these exchanges, as well as providing a method for users to retrieve their assets. To ensure the security of funds, user cash will be held in banks, while digital assets will be entrusted to a designated Korean won (KRW) exchange for safekeeping.

To enhance public interest and professional capabilities, the foundation will establish an operating committee consisting of banks, KRW exchanges, South Korean inclusive finance institutions, financial security institutions, and private experts to discuss issues related to user asset protection. Additionally, the foundation will adhere to the regulations outlined in the Virtual Asset Service Providers (VASP) Closure Guidance to ensure users receive high-level protection.

Negotiations and Asset Return Actions to Commence in October 2024

The Digital Asset Exchange Association (DAXA) will assist the foundation in negotiating with closed exchanges, and for those close to shutting down, DAXA will guide them to transfer user assets to the foundation. Asset transfers are expected to begin in October to safeguard user rights.

Rapid Development of South Korean Crypto Market Raises Regulatory Concerns

South Korea currently stands as the largest market in East Asia, with its population viewing cryptocurrencies as a viable investment option due to factors such as distrust in traditional finance and the adoption of blockchain technology by renowned companies like Samsung. Collaborations like Ripple and Yonsei University also indicate a willingness to introduce emerging technologies such as cryptocurrencies and blockchain into academic education.

However, South Korean regulatory agencies need to balance the relationship between innovative development and market stability. With regulatory upgrades, some small to medium-sized exchanges are unable to withstand compliance pressures, leading to closures or temporary suspensions, posing potential risks to investor assets. This has sparked societal concerns regarding how to protect user assets.