This content is from: Local Insights

South Korea: Confiscation of Bitcoin criminal assets

Bitcoin and other cryptocurrencies have been in the public spotlight in the last 18 months due to the drastic fluctuations in their values. Although still limited, the number of places where cryptocurrencies can be used as payment has been growing in recent times. However, most countries lack specific regulations on the issuance or use of cryptocurrencies, and there exists no clear definition of their legal nature in terms of whether they could be defined as actual currency or other assets of value, or whether they are just pieces of computing data without any intrinsic value. Due to the growing importance of regulatory aspects and legal identity in civil and criminal law, particularly in relation to confiscation, there is an urgent need to establish an appropriate definition and specify the legal nature of cryptocurrency as soon as possible.

The question has arisen as to whether proceeds in the form of bitcoin could be subject to confiscation as potential criminal assets. A person operating a pornography website, an illegal activity in Korea, was arrested and became subject to criminal penalties. As the operator received some payments in the form of bitcoin, the prosecutor demanded confiscation of this virtual currency, regarding it as part of the criminal proceeds. Without any concrete definition of its legal nature, it was inevitable that there would be heated controversy as to whether the bitcoin proceeds should be confiscated.

The Korean court of the first instance, on the premise that unidentifiable criminal proceeds cannot be confiscated, ruled that 'bitcoin, an electronic data set with neither any physical entity nor an objective standard of fiscal value, is not subject to confiscation'. In this regard, the court ordered payment in a fiat currency instead of seizure of the bitcoin proceeds.

However, the appellate court reversed the original judgment through the recognition of its property value and accordingly ordered the confiscation of the bitcoin. The appellate court's ruling was based on the grounds that (i) the predetermined amount of bitcoin was obviously distinct from other digital data which could be created or copied without limitation; (ii) the property value of an electronic file can be recognised as well, since in-game money also corresponds to goods under the Value-Added Tax Act; (iii) it is possible to identify a given bitcoin through an e-wallet address and related private key; (iv) some affiliated stores admitted Bitcoin as a means of payment in exchange for a certain rate in a legal currency; and, (v) the defendant, in reality, actualised some of his bitcoin profits in exchange for real currency.

The Supreme Court, also recognising bitcoin as intangible property, dismissed the appeal by the defendant and confirmed the judgment ordering confiscation. This case is seen as a milestone in terms of establishing the legal nature of cryptocurrency for the first time in Korea despite the paucity of concrete regulation on cryptocurrencies in any Korean statutes.

Following this case, it is highly likely that the same decision will be applied to other cryptocurrencies as well. However, as for cryptocurrency based on a private block-chain, the property value would not be recognised due to its limited usage, along with the theoretically unlimited amounts that can be issued.

It seems the ruling is consistent with the international trend of recognising the property value of cryptocurrency, by imposing capital gains taxes on the sale of cryptocurrencies. The ruling may possibly be used as an important reference point for anticipated Korean legislation related to cryptocurrency. In this regard, it is ultimately necessary to set the standard through legislation, in consideration of the fact that the case ruling per se does not guarantee predictability or consistency as regards the legal nature of cryptocurrency.

Chan Sik Ahn

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