Police custody guidelines ignored in Bitcoin seizure case
South Korean police officers from the Gangnam Police Station in Seoul apparently didn’t follow proper cryptocurrency custody procedures. This led to the loss of more than $1.4 million in Bitcoin at current prices, according to a local media report. The situation seems pretty straightforward—they confiscated the Bitcoin but then mishandled it completely.
Here’s what happened, I think. Back in 2021, police seized 22 Bitcoin from a company that had been hacked. Standard procedure would have been to transfer those assets to a secure cold wallet controlled by the investigative agency. That’s what the National Police Agency guidelines recommend, at least according to the report. But that’s not what they did.
Third-party custody without proper controls
Instead of securing the Bitcoin themselves, the police allowed the funds to remain in a wallet managed by a third party. Worse still, they didn’t even have the seed phrase to access the funds. That’s like locking something in a safe but giving someone else the only key. It doesn’t make much sense from a security standpoint.
Without control of the wallet, the police lost track of the funds in 2022. The firm that had the seed phrase apparently borrowed Bitcoin from an individual identified as “Jeong,” who was also given the wallet’s secret phrase. The whole arrangement seems rather questionable when you think about it.
Missing funds discovered during unrelated review
The missing Bitcoin was only discovered this year, and somewhat by accident. A review by the Gwangju District Prosecutors’ Office found a different case involving 320 missing Bitcoin—worth around $21 million. During that investigation, they stumbled upon the 22 Bitcoin missing from the Gangnam Police Station.
Now two individuals have been arrested by the Gyeonggi Northern Provincial Police Agency in connection with the missing funds. A police official told Chosun Daily they’re investigating “how the Bitcoin was leaked out.” That seems like the right question to ask, honestly.
Broader context of bribery and regulatory scrutiny
There’s more to the story, perhaps. While the investigation continues, we know that a member of the original hacking investigation team was indicted on bribery charges last year. The third-party firm in question reportedly offered bribes to influence the investigation in their favor, according to Dong-A Ilbo’s report.
This incident comes at a time when South Korean financial regulators are facing increased scrutiny. Earlier this month, they failed to detect an internal system flaw that led to $43 billion in erroneous Bitcoin distributions on crypto exchange Bithumb. Instead of sending about $1.40 to users as part of a promotion, the exchange accidentally sent as much as 2,000 Bitcoin—roughly $135 million—to hundreds of users.
The pattern here is concerning, I’d say. Both cases involve significant amounts of cryptocurrency being mishandled due to procedural failures. In the police case, it was a failure to follow custody guidelines. In the exchange case, it was a technical error that went undetected.
What strikes me is how preventable these situations seem. Proper custody procedures exist for a reason. Cold wallets, seed phrase security, internal controls—these aren’t new concepts in cryptocurrency management. Yet here we are, with millions of dollars worth of Bitcoin disappearing or being misallocated.
The arrests suggest authorities are taking the matter seriously, at least now that the damage is done. But the broader question remains about whether institutional handling of cryptocurrency in South Korea needs a fundamental rethink. These aren’t isolated incidents anymore—they’re becoming a pattern that’s hard to ignore.
