I suppose it doubles as a security deposit in case the tenant mistreats the property. I've known several people who acted as landlords- one rented out an apartment above their storefront, two others rented out their homes when they had to move for work but couldn't find a buyer (this was around the 2008 crash).
All three cases ended with the tenants doing significant damage to the property that wasn't covered by the standard security deposit. I think one case was a secret junkie who went off the deep end, the others were college kids iirc.
I don't think I'd want to be a renter without my key money held in escrow or at the very least a lean held against the property, but that does break the system a bit.
Of course there might be competing claims that may take precedence. Usually mortgage or prior loans. So you are supposed to do research on the property before signing a jeonse. There are also insurances for Jeonse as well.
Having said this, I still agree that Jeonse is crazy. I think South Korea is due for a huge painful recession when the housing, construction and capital market collapses due to Jeonse domino and the Legoland fiasco.
I don’t get the economics here. It doesn’t matter who manages the money (apart from the fact that your savings go to someone who is barely able to assess risks), the landlord only keeps the average interest. Why can’t a tenant invest the money themselves and pay the interest to the landlord as usual? Why transfer a principal part as a loan? It doesn’t make a better interest rate.
Jeonse scheme sounds crazy to me: you basically provide a loan to an individual - one of the worst risks in my book, which has indeed bitten hundreds of asses according to $title. Individuals die, disappear, go bankrupt, go to jail, become motivated to screw you. Personally I wouldn’t give more than $1k to a random individual without a proper collateral, no matter how good the legal system works. Trusting them all your savings? That’s insane.