South Korea Proposes Law to Seize Self-Custodied Virtual Assets

Tax authorities in South Korea are advocating for a significant legislative update to the Criminal Procedure Act to enhance their ability to seize digital assets held in private wallets. This initiative aims to address the legal and technical challenges associated with self-custodied cryptocurrencies, where individuals maintain direct control of their private keys without relying on centralized exchanges or third-party intermediaries.

Legislative Proposals for Private Key Control

The proposal was detailed in a research paper titled "Limitations and Legislative Review of Seizure Execution for Self-Preserved Virtual Assets," published in the June edition of the Journal of Criminal Policy Research. Lead author Jang Hee-won, head of the National Tax Service (NTS) investigation team, along with three other officials, argues that current laws lack the specific procedures required to handle assets stored on hardware wallets or non-custodial software.

The research highlights several critical requirements for future enforcement:

• The necessity for search warrants to explicitly define the type and quantity of digital assets targeted for seizure.
• Legal frameworks that mandate the transfer of assets to public wallets under state control during investigations.
• Specific stipulations for obtaining or gaining control over private keys and mnemonic phrases held by suspects.

Addressing Technical Gaps in Asset Forfeiture

Under existing South Korean regulations, seizing assets from centralized exchanges like Upbit or Bithumb is relatively straightforward through cooperation with the platform. However, assets held on blockchain networks via private wallets present a hurdle, as the state cannot force a transaction without the owner’s cryptographic signature. The NTS officials suggest that the Criminal Procedure Act must be revised to provide clear legal authority for investigators to compel the disclosure of access means or to bypass technical barriers during the seizure of Bitcoin (BTC), Ethereum (ETH), and other virtual currencies.

Requirements and procedures for transferring assets to public wallets or gaining control over private keys must be separately and clearly stipulated in the law.

The proposed changes represent a move toward closing loopholes used for tax evasion and money laundering within the Web3 ecosystem. By establishing a formal process for the seizure of self-preserved assets, the South Korean government seeks to ensure that digital wealth is subject to the same judicial oversight as traditional financial assets, regardless of the storage method employed by the user.