South Korea’s National Tax Service seized crypto assets during recent enforcement actions against 124 high-value tax evaders, but now, a large chunk of that crypto cash has been lost. The operation originally resulted in the confiscation of crypto holdings worth about 8.1 billion won, or roughly $5.6 million. However, officials later issued a press release to showcase these efforts in recovering delinquent taxes, and the release included photographs of Ledger hardware wallets taken into custody along with handwritten notes that displayed the wallet seed phrases.
Those images attached to the press release turned out to be the critical error. High-resolution photos clearly showed the mnemonic recovery phrases, which serve as the master key for accessing the wallets. This exposure eliminated any protection provided by the offline cold storage on the Ledger devices. Possession of the seed phrase allows complete control, and anyone who knows the phrase can import it into software or another hardware wallet and initiate transfers without the original device.
In this case, an unknown individual who saw the photos published by law enforcement first added a small amount of ether to one of the addresses to cover Ethereum network gas fees necessary for outbound transactions. From there, they executed three transfers to move approximately 4 million Pre-Retogeum, or PRTG, tokens. At the time, those tokens carried a value of $4.8 million, but reporting from The Block indicates liquidating that much value from the holdings would have proven difficult due to market dynamics.
According to a local report, a Hansung University professor said the incident showed “the tax authorities’ basic lack of understanding of virtual assets” and cost the national treasury billions in Korean won.
Because the seed phrase appeared in a widely distributed press release, investigators have no clear suspect. The theft could have been carried out by any observer. Additionally, crypto lacks a central authority capable of clawing back assets in most cases. Recovery options exist primarily when stablecoins are involved or if the money reaches a regulated exchange that can cooperate with law enforcement.
Notably, this is not the first time a mishap has occurred with crypto funds previously seized by law enforcement in South Korea. In November 2021, the Gangnam Police Station seized 22 bitcoin during an investigation into a hacking complaint involving the A Coin Foundation. The department stored the coins in a wallet provided by the foundation, and the recovery phrase later reached a third party. Last week, police arrested two individuals linked to the foundation on suspicion of using that phrase to drain the Bitcoin from evidence storage. The 22 bitcoin are now worth around $1.5 million.
As these cases illustrate, full self-custody in crypto places significant responsibility on individuals. This independence comes with new vulnerabilities, and criminals have increasingly turned to home invasions and violence against people known to hold substantial crypto. A recent incident in Scottsdale, Arizona involved two California teenagers who drove more than 600 miles to a residence. The pair posed as delivery drivers, forced their way inside the home, and used duct tape to restrain a couple while demanding crypto assets they believed were worth $66 million. Police caught and arrested the suspects shortly thereafter.
Employees, government officials, and other individuals with access to the personal information of crypto users are also emerging as a key security hole. One former Revolut staff member allegedly tried to blackmail a customer by threatening to expose details unless a crypto ransom was paid. Separately, a French tax official reportedly leaked personal data on crypto users to criminal networks in exchange for payment.
Online and over-the-phone scammers also frequently use the finality of blockchain payments by directing victims to send money through crypto ATMs, after which recovery becomes nearly impossible. This tactic has hit elderly targets in the United States particularly hard. In Minnesota, state lawmakers and local police departments are backing a complete ban on these kiosks, and similar concerns have been brought up in Maine, Massachusetts, Kansas, and many other states. The FBI previously estimated the nationwide impact of these sorts of scams at $333 million last year, and that data did not even include December.
