South Korea's KNPA drafts crypto seizure rules after custody lapses

South Korea's National Police Agency (KNPA) has drafted comprehensive new guidelines for handling seized cryptocurrencies following multiple security lapses and custody failures that exposed serious vulnerabilities in digital asset management.

“"In the past, seized assets were stored in warehouses”

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The move represents a significant shift from traditional asset storage methods to more sophisticated digital asset protocols, as authorities grapple with the complexities of securing blockchain-based evidence.

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The new directive outlines standardized procedures for managing wallet addresses, private keys, and software wallets across all stages of seizure, storage, and management.

This regulatory response comes after a series of high-profile incidents, including a phishing-related custody incident where government-held Bitcoin disappeared from prosecutors' custody, prompting urgent action to strengthen controls and prevent future losses.

The new guidelines establish rigorous security protocols tailored to different types of cryptocurrencies, recognizing that standard digital assets require distinct handling protocols compared to privacy-focused coins.

For common cryptocurrencies like Bitcoin and Ether, the rules mandate the use of official blockchain explorers for verification and strictly prohibit keeping private keys online.

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Privacy-focused assets such as Monero and Zcash require specialized software wallets hosted on dedicated servers with securely sealed private keys, as hardware wallets were found unsuitable for these privacy-preserving tokens.

The agency also enforces strict separation of PINs, mnemonics, and physical keys to create multiple layers of security through segregation.

A police spokesperson emphasized the paradigm shift, noting that 'in the past, seized assets were stored in warehouses. Now we must manage wallet addresses and private keys,' reflecting the evolving nature of digital evidence management.

The KNPA is also moving toward establishing professional third-party custody services to handle substantial crypto holdings, reflecting recognition that specialized expertise is needed for secure digital asset management.

“South Korea’s National Police Agency has introduced new guidelines for handling seized cryptocurrencies after multiple security lapses”

crypto.news

According to reports, the agency plans to finalize the selection of a private custody provider within the first half of 2026, though this process has encountered significant challenges.

Three separate bidding attempts in 2025 reportedly failed after firms that applied were deemed unsuitable, highlighting the difficulty in finding qualified partners.

Budget constraints further complicate the implementation, with the police allocated only 83 million won (about $55,600) to handle seized crypto assets despite the substantial risks involved.

This limited funding raises concerns about the feasibility of implementing robust security measures and maintaining adequate oversight of increasingly valuable digital assets.

The scale of crypto seizures by South Korean authorities underscores the significance of these regulatory reforms.

Based on cases with finalized court rulings, the value of crypto seized by police in the last five years totals approximately 54.5 billion won (about $36.5 million), with Bitcoin and Ether comprising the vast majority of these holdings.

Cryptonews.net

Specifically, authorities have seized about 50.7 billion won in Bitcoin and 1.8 billion won in Ether, reflecting the dominance of these major cryptocurrencies in criminal investigations.

This substantial portfolio highlights the critical need for secure custody solutions, as these digital assets represent not just evidence but also significant public funds that must be properly managed.

The composition of seized assets also emphasizes the importance of developing tailored protocols for different cryptocurrency types, given their varying liquidity profiles, transaction speeds, and security considerations.

These regulatory developments reflect South Korea's broader movement toward more advanced crypto governance, positioning the country at the forefront of institutional digital asset management practices.

“The South Korean National Police Agency (KNPA) has introduced a new set of guidelines to improve how seized digital assets are managed, with these rules taking effect from March 16, 2026”

EconoTimes

The KNPA's forthcoming custody framework seeks to redefine how authorities handle digital assets from seizure through eventual disposition by mandating systematic governance of wallet addresses, access controls, and private keys.

EconoTimes

This approach aligns with global trends where authorities increasingly require auditable chains of custody and documented controls for digital evidence.

The Ministry of Finance views these guidelines as crucial for rebuilding public confidence and safeguarding state-held digital assets as crypto adoption continues to gain momentum.

By moving away from informal or makeshift storage methods toward structured, professional protocols, South Korea aims to reduce the risks of human error and establish best practices that could serve as a model for other jurisdictions grappling with similar challenges in digital asset management.