Bitcoin seizure on South Korean exchanges: how to protect yourself
For users of centralized exchanges in South Korea, the new "Virtual Asset User Protection Act," which came into force on July 19, 2024, represents a real risk of asset freezing. This article explains how to mitigate this risk and what to do if your account is blocked.
Key Takeaways (TL;DR)
- The risk is real: Since July 19, 2024, cryptocurrencies in South Korea are officially recognized as property that can be frozen at the request of regulators (FSC, KoFIU) without a court order or confiscated by court decision.
- CEX Vulnerability: Assets on centralized exchanges (Upbit, Bithumb) do not legally belong to you. The exchange is obligated to block them at the first request of the authorities.
- The best protection is self-custody: Transfer assets to non-custodial wallets (hardware or software) or use multi-signature (multisig) solutions to distribute control.
- Action plan for blocks: Immediately gather evidence (TxID, AML reports), send an official request to the exchange's support, and if the amount is significant (approximately 13–15 million KRW or more), consult a lawyer.
1. The New Reality: Why Your Assets on Korean Exchanges Are at Risk
With the implementation of the Virtual Asset User Protection Act on July 19, 2024, South Korea completed the legal recognition of cryptocurrencies, classifying them as property. This decision, also based on Supreme Court precedent (Case No. 2018Do3033), means that funds in centralized exchange (CEX) accounts can be frozen and seized as part of administrative or criminal procedures. The principle "Not your keys, not your coins" has now become legal practice.
2. Legal Context: Laws, Regulators, and Procedures
Key Laws and Regulators
- Virtual Asset User Protection Act (2024): Grants the Financial Services Commission (FSC) and the Korea Financial Intelligence Unit (KoFIU) powers for market oversight, investor protection, and anti-money laundering.
- Act on Reporting and Use of Specific Financial Transaction Information (Specified Financial Transaction Information Act): Requires exchanges to adhere to strict AML/KYC procedures and report suspicious transactions to the KoFIU.
- Act on Regulation and Punishment of Concealment of Gains from Crimes: Serves as the legal basis for criminal asset confiscation.
- National Tax Collection Act: Allows tax authorities to seize assets to settle tax liabilities.
Seizure Procedures: From Freezing to Confiscation
It is important to distinguish between two main mechanisms:
-
Administrative Freeze (Seizure):
- Initiator: Regulators (FSC, KoFIU) or the tax service.
- Basis: Suspicious activity (AML flags), investigation into market manipulation, or ensuring tax payments. The regulator has the right to demand a freeze without a prior court order under its AML/CFT powers.
- Result: Temporary blocking of assets during the investigation.
-
Criminal Confiscation:
- Initiator: The Prosecutor's Office within a criminal case (fraud, money laundering).
- Basis: Proven link between the assets and criminal activity.
- Procedure: Requires a final court decision.
- Result: Irrevocable seizure of assets by the state.
The exchange, as a licensed custodian, is obliged to immediately execute any of these requests.
3. Block Triggers and Risk Groups
- AML Flags: Receiving funds from addresses associated with sanctions, the darknet, mixers, scams, or thefts. Exchange monitoring systems automatically react to high-risk transactions.
- Frequent P2P Operations: Regular trades with unverified counterparties increase the risk of receiving "dirty" coins.
- KYC Non-compliance: Providing incomplete or inaccurate data.
Who is at risk: Any CEX user, but especially traders and arbitrageurs due to the high volume of transactions from various sources.
4. Comprehensive Asset Protection Strategy
Preventive Action Plan: Checklist
- Urgent:
- Withdraw the bulk of your assets from exchanges to non-custodial wallets.
- Create secure backups of your seed phrases on physical media (e.g., steel plates) and store them in different safe locations.
- Regularly:
- Perform an AML check on counterparty addresses before receiving funds into your exchange account.
- Maintain AML check reports and Source of Funds documentation.
- For Large Amounts:
- Use multi-signature wallets (2-of-3 or 3-of-5 schemes) to distribute control.
Step 1: Switching to Non-Custodial Wallets
- Perform a test transaction: Send a minimal amount to ensure the address is correct.
- Verify network and address: Ensure network compatibility (e.g., ERC-20 vs. BEP-20) and double-check the first and last characters of the address. Take fees and minimum withdrawal amounts into account.
- Wait for confirmations: Consider the transaction complete after a sufficient number of network confirmations. Benchmarks: 3–6 for BTC and 12+ for ETH, but specific values depend on the token, network congestion, and service policy.
Step 2: Using Multi-Signature (Multisig)
Multisig requires multiple keys to authorize a transaction, eliminating a single point of failure.
Quick Guide:
- Choose a provider: Gnosis Safe (for EVM networks), Specter Desktop (for Bitcoin), or other reliable solutions.
- Distribute keys: Use a 2-of-3 or 3-of-5 scheme. Store keys on different devices and in different geographical locations.
- Create a recovery plan: Develop a procedure in case one of the keys is lost.
- Draft an agreement: For joint ownership, formalize a legal agreement defining the rights, responsibilities, and tax implications for each co-owner.
Warning: Co-signatories may bear legal and tax liability for the assets, especially if they are in different jurisdictions.
5. What to Do If Your Account Is Already Blocked
Step 1: Information Gathering and Contacting Support
Save all correspondence with the exchange, screenshots, and transaction IDs (TxID). Send an official request to support.
Request Template
Subject: Official Inquiry Regarding Account Status [Your ID] — Asset Block
Dear [Exchange Name] Support Team,
My account with ID [Your User ID] was blocked on [Date and Time].
I request the following information:
- The official reason for the block.
- The regulatory act or specific clause in the Terms of Service upon which the block is based.
- An exact list of documents required to lift the restrictions.
I am prepared to provide all necessary documentation to verify my identity and the legal source of my funds.
Respectfully,
[Your Name]
Step 2: Preparing the Evidence Base
Document Checklist:
- KYC: Passport, proof of address.
- Source of Funds Proof: Statements from other exchanges, P2P trade screenshots, bank statements.
- AML Service Report: A report proving the "cleanliness" of incoming transactions.
How to Obtain an AML Report
- Services: Paid services (Chainalysis, Elliptic, Crystal) or independent analysts.
- Cost: From $100 to $500 and up, depending on analysis complexity.
- Timeframe: Usually 1–3 business days.
- Content: The report should include the flow of funds, a risk score, and an analyst's conclusion on the asset's legitimacy.
Step 3: Appeal and Legal Assistance
- Appeal Procedure:
- Administrative Complaint: Filing a complaint with the organization itself (the exchange) or a superior body (FSC/KoFIU).
- Lawsuit: If the complaint yields no result, a lawsuit can be filed in court.
- Interim Measures: As part of a lawsuit, you can file a motion for temporary measures to prevent further actions regarding the assets.
- Deadlines: To contest administrative actions, the Administrative Litigation Act sets a deadline of 90 days from the moment you became aware of the violation of your rights.
Contact a lawyer immediately if:
- The exchange cites a request from the FSC, KoFIU, police, or prosecution.
- The amount of frozen funds is significant (a practical benchmark is 13–15 million KRW or more, or an amount that justifies legal fees).
- Support does not respond for more than 7–10 business days.
Search for a lawyer using the query "virtual asset specialist lawyer" via the Korean Bar Association.
6. Appealing to the Regulator
If the exchange does not respond or its response is unsatisfactory, you can file a complaint directly with the FSC or KoFIU.
Regulator Appeal Template (FSC/KoFIU)
Subject: Complaint Against [Exchange Name] — Account Block [Your ID]
Dear Representatives of the [FSC/KoFIU],
I, [Your Name], am a client of [Exchange Name] (Account ID: [Your ID]). On [Date], my assets were blocked without a clear explanation of the reasons.
I have repeatedly contacted the exchange's support (dates of contact: [Dates]), but have received no official response / received a formal refusal. Copies of the correspondence are attached.
I request that you:
- Verify the legality of the actions taken by [Exchange Name].
- Request from the exchange the grounds for blocking my account.
- Assist in restoring my access to my assets.
Attached documents: [List: KYC, proof of source of funds, correspondence with the exchange].
Respectfully,
[Your Name], [Contact Information]
Submission Channels: Complaints can be submitted through the official websites of the regulators in the public petition sections. The expected response time is 14 to 30 days.
7. Practical Case Studies
- Case 1 (Successful Appeal): A trader received funds from a P2P platform, after which his account was frozen due to an AML flag. He provided the exchange with a pre-prepared AML report for the transaction and statements. After an investigation lasting several weeks, the block was lifted.
Conclusion: Proactive preparation of evidence works. - Case 2 (Confiscation): A user received a large sum from an anonymous source associated with a hack of another exchange. He could not prove the legal origin of the funds. The assets were frozen at the request of the KoFIU and, following a court decision, were confiscated.
Conclusion: The source of funds is of critical importance.
8. Conclusion
The integration of cryptocurrencies into South Korea's legal framework increases market transparency but creates risks for users of custodial services. In this new environment, self-custody of keys, preventive AML audits, and legal literacy are becoming essential elements for maintaining control over your assets.
Disclaimer: This material is for informational purposes only and does not constitute legal or financial advice. The article does not provide recommendations for specific law firms or financial instruments. To resolve legal issues, it is recommended to consult a specialized lawyer.
Sources and Useful Links
- Financial Services Commission (FSC):
www.fsc.go.kr/eng - Korea Financial Intelligence Unit (KoFIU):
www.kofiu.go.kr - Korea Law Translation Center:
elaw.klri.re.kr (English translations of laws) - Key Documents (Originals in Korean):
Virtual Asset User Protection Act: Link to law text
Supreme Court Decision No. 2018Do3033: Link to case