Concerns are growing over the lack of institutional safeguards to protect user assets in cryptocurrency exchange bankruptcies due to the absence of a Digital Asset Basic Act in South Korea.
According to financial industry sources on Wednesday, cryptocurrency exchange ProBit, which ceased operations in March 2024, abruptly initiated bankruptcy proceedings in April last year. Data from the office of Rep. Kang Min-kuk of the ruling People Power Party shows that 5,174 users were entitled to asset returns totaling approximately 2.2 billion won ($1.6 million), but users missed the opportunity to file creditor claims because they were not adequately notified of the bankruptcy proceedings.
"Because users failed to file creditor claims, only one employee claiming severance pay was registered as a first-priority creditor, and the remaining assets are understood to have gone to shareholders as second-priority creditors," an industry official familiar with the matter said. "Conflict of interest allegations have also been raised as the exchange's former CEO, who is a lawyer, participated as the bankruptcy representative."
These problems stem from the lack of clear legal definition for user assets when exchanges go bankrupt. Currently, cryptocurrencies deposited by users are treated the same as general claims, with no guaranteed priority for repayment. This contrasts sharply with stocks held at securities firms, which are separately held under the owner's name and returned immediately, or bank deposits protected under the Depositor Protection Act.
To prevent such damage, DAXA (Digital Asset Exchange Alliance), a self-regulatory body for cryptocurrency exchanges, has established and operates a Digital Asset Protection Foundation to recover assets for users of closed exchanges. However, its effectiveness is limited due to the lack of legal enforcement power.
The gap in user protection is not limited to exchanges. Industry observers point out that virtually all business areas except exchanges remain in regulatory blind spots. "The legality of referral businesses has not been clearly determined, and cryptocurrency investment advisory services are also operating without institutional basis," said Kwon Oh-hoon, a lawyer at Cha & Kwon. "Even now, a decade after the ICO controversy, basic industry classifications and regulatory frameworks for conduct have yet to be established."