South Korean regulators commit to custody policy reforms amid mounting losses

South Korea wants to revamp policies governing the custody of confiscated cryptocurrencies. The country’s Finance Minister and Deputy Prime Minister Koo Yoon-cheol revealed plans for major changes to how authorities handle digital assets.

Koo announced, “The government will, in collaboration with relevant agencies such as the Financial Services Commission and the Financial Supervisory Service, conduct an inspection of the current status and management practices of digital assets held and managed by the government and public institutions.”

The news comes after a report last week revealed that Gangnam District police lost 22 BTC from 2022 due to a private key oversight. Investigators found that the BTC was stored in a wallet controlled by a third party, not under police control, and that the police never held the wallet’s seed phrase, a critical element for securing crypto assets.

The loss only came to light this year during a nationwide review of seized crypto holdings, launched after a separate high-value incident involving missing Bitcoin.

Separately, South Korea’s national tax service lost roughly $4.8 million from its recent $5.6 million haul. After the overhaul, the authorities circulated images showing confiscated crypto stored on Ledger wallets, along with notes listing the wallets’ recovery phrases that grant full control over the funds.

Knowing the recovery phrase means a person can restore the wallet in software or on another device and transfer the assets freely.

Koo says government only holds crypto from seizures or enforcement measures

Seeking to address concerns over recent failures, Koo said the government would urgently strengthen its crypto security framework. The minister also emphasized that the state does not hold crypto as an investment, but only takes custody of assets acquired legally.

He commented on X: “For reference, the government does not hold digital assets other than those acquired in the course of legal enforcement processes such as seizure.”

Per last week’s report, in November 2021, Gangnam Police seized 22 Bitcoins during a probe into a hacking case linked to the A Coin Foundation. However, the officers entrusted a third-party company with the seized crypto and failed to keep the private keys, resulting in a loss of roughly $1.4 million at the time.

So far, the police have arrested a pair of individuals in connection with the case, and prosecutors are investigating potential bribery.

The private key lapse revealed shortcomings in the technical controls surrounding state-held digital assets. The incident, a Hansung University professor remarked, demonstrated the tax authorities’ fundamental ignorance of the workings of digital assets and inflicted losses of billions on the national budget.

Bithumb experienced $40 billion system failure  

South Korea’s Bithumb had major system bugs earlier in February that left the platform vulnerable to possible sabotage, and which permitted a misdirected transfer exceeding $40 billion.

During a promotional event, customers received 620,000 Bitcoins instead of 620,000 won ($426), driving Bitcoin’s price down by 17%. Most mistaken transactions were reversed on the platform, but approximately 13 billion won ($9 million) couldn’t be recovered because some users had withdrawn or sold the funds. 

Lee Chan-jin, head of the FSS, called the situation disastrous for anyone who mistakenly sold their credited Bitcoin, adding that prices have risen since Friday and that those ordered to return it risk losing money. The glitch also exposed serious problems with exchanges’ internal accounting systems, he added.

Meanwhile, legal analysts still differ on whether recipients who cashed out the crypto may face prosecution, given a 2021 Supreme Court decision that cryptocurrency isn’t deemed “property” under Korean criminal statutes.

Want your project in front of crypto’s top minds? Feature it in our next industry report, where data meets impact.