On 25 September 2024, the South Korean Financial Services Commission (SK FSC) announced its authorization of the digital asset industry’s plan to create the Digital Asset Protection Foundation, an entity aimed at safeguarding users’ assets in the event of virtual asset service providers shutting down. This initiative, led by the Digital Asset Exchange Association (DAXA) aims to move toward protecting virtual asset users’ rights and maintaining stability in the market. The foundation will be responsible for receiving, managing, and securely returning users’ assets that were previously held by defunct exchange service providers after a structured consultation process.
The establishment of this foundation comes in response to growing concerns about the ability of VASPs to return users’ assets following business closures. Despite previous efforts by financial authorities, such as issuing guidelines for VASP closures and conducting inspections on closed exchanges, the lengthy and complex process of returning assets continues to create uncertainty for users. With ten out of twenty-two coin market exchange operators already out of business and three more having suspended operations, it has become clear that without a structured system in place, resuming business or recovering users’ assets is highly unlikely for these operators.
The challenge is further complicated by the fact that many closed VASPs hold private keys to users’ wallets, increasing the risk of asset loss or mismanagement. Recognizing the need for a more systematic and secure method for managing these assets, authorities emphasised the importance of creating a dedicated foundation to handle this task. The foundation, as a nonprofit entity, will step in where these VASPs can no longer operate, ensuring users’ funds are securely managed and eventually returned.
DAXA has been instrumental in the development of this initiative, working under the FSC’s guidance to build a solution that aligns with the industry’s self-regulatory efforts. Once established, the foundation will engage in consultation with each exchange service provider to transfer users’ funds and digital assets under its care. In the interest of efficiency and security, users’ cash deposits will be stored in banks, while a designated KRW-based exchange service provider will manage their digital assets. This structure is designed to ensure a safe and transparent process, giving users confidence in the protection of their funds.
To further enhance the foundation’s effectiveness, an operating committee will be formed, comprising representatives from the bank, the KRW-based exchange service provider, Korea Inclusive Finance Agency, Financial Security Institute, and private sector experts. This committee will oversee critical issues related to asset protection and ensure compliance with the Virtual Asset User Protection Act, as well as the established guidelines for VASP business closures.
Financial authorities will also play an active role in supporting the foundation’s operations, facilitating smooth communication and asset transfer processes between the foundation and the closed VASPs. Additionally, for VASPs that are expected to terminate operations following a renewal of registration under the Act on Reporting and Using Specified Financial Transaction Information, authorities will guide them in transferring their customers’ assets to the foundation.
Following FSC approval, the foundation will be officially established upon the completion of court registration, with operations expected to commence as early as October 2024. The foundation will immediately begin consultations with closed VASPs regarding asset transfers, providing users with a reliable mechanism for recovering their funds. The establishment of this foundation is seen as a critical move in protecting users’ assets and promoting greater order in the virtual asset market. By minimising the disruption caused by VASP closures, it will also help maintain user confidence and prevent potential market instability.
