South Korea Acts to Protect Crypto Users Amid Exchange Shutdowns
South Korea is setting up the Digital Asset User Protection Foundation to recover funds stuck in failed cryptocurrency exchanges.
Approved by the Financial Services Commission (FSC) after a proposal from the Digital Asset Exchange Joint Consultative Group (DAXA), the foundation is expected to start operations in October.
This move comes as ten of the country’s 22 cryptocurrency exchanges have shut down, and three others have temporarily suspended operations, sparking concerns among users about retrieving their funds.
What Happened to South Korea’s Crypto Exchanges?
The collapse of multiple crypto exchanges has left users unable to access their funds.
According to the FSC, out of the 22 operational platforms in South Korea, ten have ceased trading entirely, and three are currently inactive.
This has caused a surge in user anxiety as many of these exchanges stored the private keys to users' virtual asset wallets, raising questions about the safety of customer assets.
The FSC explained the situation clearly:
"To make sure that users’ assets are safely protected and properly returned to their owners, it is necessary to have a more systematic management mechanism along with voluntary efforts from those closed down exchange service providers.”
How Will the Foundation Recover Users' Funds?
The Digital Asset User Protection Foundation will coordinate with defunct exchanges to retrieve users’ funds and digital assets.
Once collected, users' fiat currency will be securely stored in a designated bank, while their virtual assets will be managed by a KRW-based exchange service provider.
Affected users will be notified of the return process, outlining how they can reclaim their funds.
This structured recovery process aims to restore trust in South Korea’s crypto market, which has been shaken by the wave of exchange closures.
Why Are Users’ Assets at Risk?
Many failed exchanges lack the resources or infrastructure to return users' funds on their own.
Customers have struggled to recover their assets because the exchanges often hold the private keys, making the process dependent on the platform’s operations.
The FSC acknowledged the difficulty in recovering assets, stating:
"We have faced difficulties in recovering the assets because they are often unable to access the operators or users of the closed exchange platforms."
How Will the Foundation Be Governed?
The foundation will be managed by a committee comprising government representatives, financial institutions, and private sector experts.
The committee will ensure compliance with South Korea’s Virtual Asset User Protection Act, which mandates that exchanges keep customer funds separate from their own.
Banks will hold users’ cash deposits, while licensed crypto exchanges will manage the virtual assets.
This collaborative approach ensures that assets are securely stored and properly returned to their owners in the event of exchange failures.
Future Guidance for Exchange Failures
Authorities have committed to helping exchanges that may face future closures, providing them with the necessary guidance to transfer their customers' assets to the foundation.
This measure ensures a streamlined process for users to recover their funds in the event of future exchange failures.
Crypto Tax Postponed Until 2028
In a related decision, South Korea has delayed its planned cryptocurrency tax until 2028, choosing to focus first on creating a stable regulatory environment.
This postponement reflects the government's priority to secure user protection before imposing additional financial obligations on crypto investors.
The establishment of the Digital Asset User Protection Foundation and the delay in the crypto tax both signify South Korea's commitment to safeguarding its cryptocurrency users in a volatile market, restoring confidence in the country's digital asset ecosystem.
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