The Financial Services Commission will authorize the digital asset industry’s plan to establish an organization that will be charged with the task of protecting users’ assets (Digital Asset Protection Foundation or “the foundation” hereinafter) on September 26. The industry’s self-regulatory initiative led by the Digital Asset Exchange Association (DAXA) aims to protect the rights and interests of virtual asset users and establish a sound order in market transactions. The foundation will be tasked with receiving users’ assets transferred out from those closed down exchange service providers after a having consultation process, and then safely keeping and managing these assets, and ultimately returning them to their owners.
Background
To help minimize potential damages inflicted to users in the event of virtual asset service providers (VASPs) going out of business, financial authorities have made continuous efforts so far to make sure that virtual asset users are able to safety get their assets back even when their service providers go out of business. To this end, authorities introduced guidelines on the business closure of VASPs and conducted site inspections on those exchange service providers that are no longer in operation. However, despite these efforts, there are continuing concerns about the protection of users’ assets due to the lengthy process of returning assets to their owners.
Currently, ten out of twenty-two coin market exchange operators have terminated their business operations and three others have suspended operating their businesses. For most of these companies that have gone out of business, it is practically difficult to resume or continue to run their business operation even with assistance from others.
It is also difficult to assume that those closed down exchange service providers will be able to return users’ assets even with continuing inputs of human and financial resources. Moreover, private keys to users’ virtual asset wallets are stored at these exchange service providers, which requires an attention and needs to be managed to prevent the possibility of mismanagement or loss of assets. Therefore, 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.
Operation of the Foundation
Against this backdrop, the DAXA has been working to establish an organization as part of the industry’s self-regulatory initiative. The foundation will be established as a nonprofit organization, authorized by the FSC, and it will carry out the function of returning users’ assets to their owners after having them transferred from the closed down exchange service providers.
After having a consultation process with individual exchange service providers, users’ funds and virtual assets will get transferred to the foundation, which will then notify users about the return process and return their assets. To ensure safety and efficiency in the custody and management of users’ assets, their cash deposits will be kept with a bank while a KRW-based exchange service provider will be selected to store and manage users’ virtual assets.
To improve its public utility and professional capacity, the foundation will set up its own operating committee, which will consist of officials from the bank (custody organization), the KRW-based exchange service provider, Korea Inclusive Finance Agency, Financial Security Institute, and private sector experts, to have discussions on important issues concerning the protection of users’ assets. In addition, the foundation will be required to comply with the relevant rules and duties required under the Virtual Asset User Protection Act and the guidelines on the business closure of VASPs to make sure an enhanced level of protection for users.
To promote a seamless operation of the foundation, financial authorities plan to provide relevant support to facilitate consultation between the foundation and the closed down exchange service providers regarding the matter of transfer of users’ assets. Moreover, for those VASPs that are expected to terminate business operation in the future following a renewal of registration process pursuant to the Act on Reporting and Using Specified Financial Transaction Information, authorities will guide them accordingly to transfer their customers’ assets to the foundation.
Further Schedule
Upon gaining an approval from the FSC, the foundation will be established once the registration process is completed with the court. Then the foundation is expected to get ready to enter into a consultation process with the closed down exchange service providers regarding the matter of transfer of users’ assets beginning from as early as October. The establishment of the foundation is expected to help protect users’ assets safely even when these assets are held by those exchange service providers that are no longer in operation. It will also contribute to establishing a sound order in the virtual asset market by minimizing the potential of market confusion that can be caused by business closure of virtual asset exchange service providers.
* Please refer to the attached PDF for details.