South Korea's Tax Authority Loses $4.8M in Crypto After Accidentally Leaking Wallet Seed Phrase

South Korea's National Tax Service (NTS) has suffered a major security breach, losing nearly $4.8 million in seized cryptocurrency after inadvertently publishing an unredacted wallet recovery phrase in an official press release. The incident marks the third significant crypto custody failure by Korean authorities within just three months, raising serious questions about institutional readiness to handle digital assets.

The Press Release Blunder

On February 26, the NTS issued a public statement announcing the seizure of 8.1 billion won (approximately $5.6 million) from 124 high-value tax delinquents. The release included photographs of confiscated items from a taxpayer identified as "Mr. C," including a Ledger cold wallet device.

Critically, one image showed a handwritten mnemonic phrase displayed in plain view without any redaction. These mnemonic phrases—typically sequences of 12 to 24 words—serve as master keys to cryptocurrency wallets, functioning as the equivalent of a password, security card, and authentication certificate combined. Anyone with access to this phrase can restore the wallet on any device and withdraw its contents without further verification.

Swift Theft Following Public Exposure

By the early morning hours of February 27, unknown individuals had already exploited the publicly disclosed information. According to Professor Cho Jae-woo of Hansung University's Blockchain Research Institute, on-chain data from Etherscan reveals that 4 million Pre-Retogeum (PRTG) tokens were transferred from the compromised wallet in three separate transactions. The thief first deposited Ethereum to cover gas fees before executing the withdrawals.

At the time of the theft, the stolen tokens were valued at approximately 6.4 billion won, or roughly $4.8 million. Professor Cho sharply criticized the agency's handling of the situation, stating the disclosure was "like advertising to open your wallet and take your money." The NTS had not issued any public statement regarding the incident at the time of reporting.

Third Major Failure in Three Months

This embarrassing episode represents the latest in a disturbing pattern of crypto custody failures by South Korean government institutions since January.

The Gwangju District Prosecutors' Office lost 320.8 Bitcoin, currently worth over $21 million, after a staff member accessed a phishing site while attempting to verify wallet storage during an asset handover. The Bitcoin, originally confiscated from a family involved in laundering illegal gambling proceeds, was eventually recovered on February 17 after investigators froze domestic and international exchange accounts, likely prompting the hacker to return the funds when unable to cash out.

Additionally, Seoul's Gangnam Police Station disclosed the disappearance of 22 Bitcoin worth over $1.4 million. This loss was discovered during a nationwide audit of law enforcement cryptocurrency holdings that was itself triggered by the Gwangju incident. Officers had failed to transfer the confiscated Bitcoin to a government-controlled cold wallet, leaving funds with a third party without retaining the necessary seed phrase for access. Two suspects have since been arrested in connection with this theft.

Growing Pains for Regulatory Ambitions

South Korea's Supreme Court ruled in January that Bitcoin qualifies as an object of seizure under criminal law, a landmark decision formally expanding state authority to confiscate digital assets. The country is also advancing regulatory frameworks for the crypto sector, with stablecoins currently in focus and regulations expected this year.

However, these three consecutive failures expose a significant gap between South Korea's regulatory ambitions as a digital asset authority and the operational preparedness of its enforcement agencies. As the country seeks to establish itself as a leader in cryptocurrency regulation, these incidents underscore the urgent need for comprehensive training and robust security protocols for handling seized digital assets.

Coinasity's Take

These sequential failures demonstrate a troubling disconnect between policy advancement and operational competence in South Korea's approach to cryptocurrency enforcement. While the country pursues progressive regulatory frameworks, its agencies are committing elementary security errors that would be unacceptable even for individual crypto holders. Publishing seed phrases in press releases represents not just negligence but a fundamental misunderstanding of blockchain security basics. Until South Korean authorities implement rigorous custody protocols and staff training, their regulatory credibility remains seriously compromised.