South Korea's National Tax Service (NTS) is accelerating plans to hand over seized virtual assets to private custodians after a security breach involving exposed mnemonic codes resulted in two separate thefts. According to a report by Zdnet Korea citing unnamed sources, the agency aims to finalize the selection of a qualified custody provider within the first half of 2026. The decision marks a significant shift in how the government handles crypto confiscations, acknowledging that in-house storage poses unacceptable risks.
Background: The Mnemonic Leak That Triggered a Crisis
On February 26, the NTS inadvertently published a photograph of a cryptocurrency wallet's recovery phrase (seed phrase) in a press release related to tax delinquency enforcement. The slip enabled attackers to drain the wallet, leading to two successive thefts. The incident sent shockwaves through South Korea's crypto community and forced the tax agency to urgently reassess its internal asset management procedures. An NTS official admitted that the fragmentation of crypto oversight across departments reflects how new the asset class remains within government operations, and that an integrated system is now seen as necessary.
Fast-Tracking Custodian Selection: H1 2026 Deadline
To prevent a repeat of the breach, the NTS is moving quickly to outsource custody. Officials are developing detailed selection criteria that include security standards, company scale, and insurance compliance aligned with the country's Virtual Asset User Protection Act. Not every cryptocurrency custody provider will qualify; the process is expected to be highly selective. “Not every custody provider can be entrusted with this,” an industry source familiar with the discussions told Zdnet Korea, citing the sensitivity of government-seized assets and the significant reputational stakes involved.
Task Force and Structural Overhaul
The NTS established a dedicated unit—the Virtual Asset Management System Advancement Task Force—on March 11 to oversee the transition. Led by Ko Young-il, the task force is designing a system that treats digital assets as a core enforcement responsibility rather than an afterthought. Ko said the approach mirrors practices already adopted in developed markets, signaling that South Korea is aligning with international standards rather than improvising its own playbook.
Beyond selecting a custodian, the task force is working through a list of structural upgrades. These include revising operational manuals that govern the full lifecycle of seized assets—from confiscation to storage to liquidation—along with conducting external audits to assess current systems. The agency is also expanding professional training, acknowledging that crypto custody is technical, unforgiving, and not something staff can learn on the fly during a live enforcement action.
In parallel, officials are preparing to launch a dedicated Digital Asset General Division that would centralize oversight of crypto-related matters currently spread across multiple departments. Details on its structure and timeline will be finalized in consultation with the Ministry of the Interior and Safety.
FAQ: Key Questions Answered
- Why is South Korea's National Tax Service using crypto custody providers? To improve security and prevent theft after a recent incident involving exposed mnemonic codes.
- When will the NTS select a custody provider? The agency aims to finalize its decision and select a provider within the first half of 2026.
- What criteria will be used to choose a crypto custodian? Security standards, company size, and insurance compliance under the Virtual Asset User Protection Act.
- What other reforms is the NTS undertaking? Creating a task force, updating manuals, expanding training, conducting audits, and planning a dedicated digital asset division.