On February 26th, a press release announcing a tax seizure was released. The press release was accompanied by images of four USB type Cold Storage wallets containing the passphrases of a delinquent taxpayer. The combination of both the images and the writing of the passphrases provided an unidentified criminal with the opportunity to steal almost<a href="https://www.bleepingcomputer.com/news/security/48m-in-crypto-stolen-after-korean-tax-agency-exposes-wallet-seed/" rel="noopener noreferrer" target="_blank"> </a>4 million PRTG tokens (approximately USD 4.8 million) from the USB devices almost immediately after the press release was released. The South Korean government's National Tax Service (NTS) issued a press release concerning this incident, offering an apology and highlighting the lapse of control over seized cryptocurrency. An investigation has already begun, initiated by the police, in response to their theft of the assets from the USB devices. The NTS has also determined that they will no longer offer custody services for seized cryptocurrency; rather than offering to the public, NTS will engage with industry experts for their custody of seized cryptocurrency. NTS plans to close applications for such industry custodians in the first half of 2026.<h2>This Is Not the First Time</h2>The February incident is the tip of the iceberg. What happened prior is even scarier. In 2021,<a href="https://www.coindesk.com/business/2026/03/02/south-korea-investigates-seed-phrase-leak-in-photo-leading-to-usd4-8-million-crypto-theft-from-tax-authority" rel="noopener noreferrer" target="_blank"> </a>Gangnam police lost 22 Bitcoins (about $1.5 million USD) after relinquishing custody of the coins to a third-party firm and failing to maintain control of the private keys associated with them. The custodian was hacked, and the coins were gone forever. The perpetrators of that theft were finally arrested five years later. That incident clearly demonstrated that government agencies are unprepared to manage seizures of cryptocurrency and that outsourcing the storage of these assets cannot be done safely without due diligence. The NTS's (National Tax Service) seizure of Bitcoin last February represented the second institutional catastrophe in the last two years, but this incident was not the product of an advanced cybercriminal attack; instead, it was the result of a photograph. A press representative sent out a high-resolution image of a Ledger hardware wallet with its<a href="https://www.dlnews.com/articles/regulation/south-korean-government-leak-crypto-seed-phrases-usd5m-vanishes/" rel="noopener noreferrer" target="_blank"> </a>seed phrase — a 24-word mnemonic that provides complete and irreversible access to all of the assets in the wallet — on it without blurring either portion of the image. Whoever saw that image first moved the funds just a few hours later. All the safeguards included in the cold storage security architecture, which are designed specifically to prevent this type of loss from occurring, were negated by a single mistake. A broad investigation was launched into the digital assets belonging to public authorities (agencies) by the Ministry of Finance. The Legal Enforcement Agency directed this audit, and it ordered the Financial Services Commission and the Financial Supervisory Service to check for compliance with best-practice management standards across all agencies managing confiscated cryptocurrency. The purpose of the audit is to identify weaknesses in procedures, put in place measures to protect against such events happening again, and prevent a third occurrence of such an event happening.<h2>The Task Force and What It's Building</h2> On March 11, the NTS launched the Advanced Virtual Asset Management (Task Force) to provide fiscal and operational support for the seizure, storage, appraisal and liquidation of seized assets under the full life cycle of seized assets. Run by Ko Young-il, this initiative is much more than just an initiative to provide custodial outsourcing; it is a complete restructuring of how digital assets are treated by the government as evidence and as a form of currency. As part of the taskforce's efforts to centralize all crypto-related activities into one location, a Digital Asset Management Division will also be established to provide from which all operational procedures related to digital asset management will be conducted on a consolidated basis, as opposed to the current model where each agency performs its own processes related to seized crypto independently and without consistency with respect to key management, storage methods and liquidation procedures. Centralizing the authority to manage all operational procedures through the establishment of a Digital Asset Management Division will create operational standards for managing digital assets that will apply to all crypto-related activities. Security architecture, size of the organization and insurance required by the<a href="https://www.ainvest.com/news/south-korea-crypto-enforcement-flow-losses-rules-2603/" rel="noopener noreferrer" target="_blank"> </a>South Korean Virtual Asset User Protection Act will be used to determine which service provider to choose from at the time of selection. In three rounds of bidding in 2025 no suitable partner was identified. The limited budget has also contributed to this, as approximately<a href="https://coinlaw.io/korean-tax-service-seed-phrase-leak/" rel="noopener noreferrer" target="_blank"> </a>83 million won (approx USD 55,600) was allocated for dealing with confiscated cryptocurrency. This represents a very small proportion of the total value of transactions that can occur at any given time (in the millions) and will create an insurmountable financial barrier for institutional quality custody. Furthermore, there has been no response publicly as to whether the budget will increase along with the criteria established for selecting the service provider.<h2>The Broader Regulatory Picture</h2> There are significant and ongoing failures related to custody inside a definitely increasing regulatory environment. The size of South Korea's crypto market has exploded, reaching a staggering<a href="https://www.theblock.co/post/394298/south-korean-lawmakers-abolish-crypto-tax" rel="noopener noreferrer" target="_blank"> </a>95.1 trillion won ($63.4 billion) by the middle of 2025. In 2026, the<a href="https://cointelegraph.com/news/how-south-korea-is-using-ai-to-detect-crypto-market-manipulation" rel="noopener noreferrer" target="_blank"> </a>Financial Supervisory Service introduced AI-based monitoring systems to detect market manipulation, coordinated price manipulation, and whale trading. As a result of this scrutiny, audits of cryptocurrency exchanges increased rapidly. Finally, the Virtual Asset User Protection Act established insurance requirements for custody providers, which will now be used by the NTS as a basis for selection. Simultaneously, the People's Power Party, which is the opposition party in South Korea, has proposed a bill to<a href="https://www.theblock.co/post/394298/south-korean-lawmakers-abolish-crypto-tax" rel="noopener noreferrer" target="_blank"> </a>eliminate all digital asset taxes by 2027. The reasoning behind this proposal is that taxing income on digital assets results in double taxation (for example: your income tax + your capital gains tax). Furthermore, the party asserts that by creating a new tax for crypto investments would contradict their previous action which was to discontinue the financial investment income tax. At the same time as this proposal is progressing through National Assembly, the NTS is developing an infrastructure to collect and hold those same taxes. The irony here is apparent. Also, there will be standardized guidelines produced by law enforcement agencies that will provide guidance on how to manage different types of seized crypto, such as privacy coins (e.g. Zcash), and detail how to run and manage software wallets and manage multiple-signature keys. These guidelines highlight that the traditional asset investigation skills do not transition well to achieving successful investigations regarding digital assets due to the amount of digital currency lost in 2021 as a result of the exposure of the seed phrase in 2026.When a seed phrase has been captured in a photo/video and made publicly available, that is considered a permanent breach of all digital wallets connected to that seed phrase. The most significant financial loss resulting from this is documented from South Korea.

South Korea’s tax agency will outsource crypto custody after security failures like a seed phrase leak and past losses, exposing weak handling and spurring digital asset reforms.

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