Only 30% of Failed Korean Exchanges Actually Return Customer Funds
Financial authorities in Korea revealed the gruesome truth about defunct local crypto exchanges, saying 70% don’t return user funds when they collapse.
- 70% of failed Korean crypto exchanges do not return user funds, often without notifying customers.
- The Virtual Asset User Protection Act, effective July 19, 2024, will enforce 15-year transaction records, fund segregation, and cold wallet storage.
- South Korea’s crypto market grew, with daily trading volumes up 24%, and the won became the top traded currency against crypto globally.
As regulatory oversight on Korean crypto exchanges is yet to take effect, users are still exposed to high risks if these platforms crash. Korea’s Financial Supervisory Service (FSS) and the Korean Financial Intelligence Unit shared joint research revealing that seven of ten defunct Korean crypto exchanges fail to pay users.
Six of those seven didn’t even notify customers about their plans to shut down, with users left only being told during the fact. The FSS also said if customer funds were to be refunded, usually just one or two employees would be assigned.
The news comes ahead of the Virtual Asset Investor Protection law, which is set to take effect by July 19 and aims to protect the roughly 10% of South Koreans in crypto. The law aims to place tighter methods around Korean crypto exchanges, such as holding reserves, keeping records, or having cold wallets.
Korea’s Virtual Asset User Protection Act
Korean legislation already has an act called the Virtual Asset User Protection Act, effective July 2024, which is expected to address the issue of crypto exchanges not refunding customer funds by imposing the following measures:
- Maintain transaction records for at least 15 years for verification and tracking.
- Segregate customer funds from operational assets as required by the Financial Services Commission (FSC).
- Store at least 80% of customer assets in cold wallets to protect against hacking.
The act also provides guidelines on identifying NFTs, saying they are virtual assets if they are mass-issued, divisible, used for payments, or are exchangeable for other virtual assets.
Before the Virtual Asset User Protection Act, South Korea had the Act on Reporting and Use of Certain Financial Transaction Information, mainly intended to address anti-money laundering (AML) requirements. However, the limited act wasn’t enough to protect the full scope of user funds in the event of a collapse.
Oversight regarding crypto exchange reserves could be necessary due to South Korea’s booming crypto activity. In fact, local active registered crypto users rose from 390,000 to 6.45 million by the end of 2023, representing over 10% of the population, with nearly 60% of users in their 30s and 40s, per Bloomberg.
The FSC reports that in 2023 alone, the country saw two coin market operators and two wallet/storage businesses close.
How the South Korean Won Dominates Crypto
In Q1 2024, the South Korean won demonstrated its competitiveness in the global crypto market by becoming the most traded currency against crypto-assets, surpassing even the US dollar, according to Kaiko.
The country’s largest exchange, Upbit, also competes globally, frequently ranking among the top five platforms by trading volume.
South Korea experienced a surge in investments, signaling an expanding market. Daily crypto trading volumes increased by 24% to 3.6 trillion won, worth $2.6 billion, while the total value of crypto held by exchanges grew by 53% to 43.6 trillion won, worth $31.7 billion.
The Virtual Asset User Protection Act, effective July 2024, addresses the issue of 70% of failed Korean crypto exchanges not returning user funds by enforcing measures like 15-year transaction record maintenance, customer fund segregation, and cold wallet asset storage to secure customer funds.
