Revealed: How South Korean police lost $1.4m worth of Bitcoin

South Korean police lost $1.4 million worth of Bitcoin by storing the coins in an unnamed third party’s wallet and failing to adhere to guidelines issued two months prior, a new report claims.

Police discovered the missing Bitcoin earlier this year after another, unrelated case saw prosecutors in Gwangju temporarily lose control of 320 Bitcoin, currently worth over $20 million.

The National Police Agency followed up with an audit, asking all police stations in the country to check on the status of confiscated crypto.

That’s when Gangnam Police Station, one of the most affluent parts of the South Korean capital, discovered 22 Bitcoin, seized in 2022, were missing.

The problem, per a report from South Korean newspaper Dong-A Ilbo, was that the police were never really in control of the Bitcoin in the first place.

Voluntary surrender

Quoting anonymous police sources and other people familiar with the matter, the newspaper explained the incident has its roots in a police probe into the suspected hack of an unnamed crypto exchange in November 2021.

While examining the exchange’s transaction records, Gangnam Police Station officers reportedly discovered that a single account holder had sold a large quantity of unnamed altcoins for Bitcoin, and then attempted to move the tokens to an overseas exchange.

The hacked exchange moved to block these transactions. Its efforts were at least partially successful, leaving 22 Bitcoin in the account.

The account’s owner reportedly told the police they had nothing to do with these transactions, and that the Bitcoin “was not theirs.”

This individual then “voluntarily surrendered” the coins to the police, Dong-A Ilbo reported.

The was then supposed to store the Bitcoin in a police-controlled cold wallet, an offline hard drive designed to store crypto. That’s what the then-recently issued National Police Agency guidelines said they should do.

But that’s not what happened. Instead, officers reportedly agreed to keep the Bitcoin in a cold wallet owned by a company that had requested to investigate the hacking incident.

The newspaper’s sources said the officers never even learned the wallet’s seed phrases, the combinations of 12 to 24 words that can back up and restore crypto wallets.

An employee of the aforementioned company reportedly told the newspaper the company handed the seed phrases over to a hacker surnamed Jeong in May 2022 after experiencing financial difficulties.

Soon after, the 22 Bitcoin disappeared from the cold wallet, which was still being held in a sealed vault at Gangnam Police Station.

Missing pieces

How exactly Jeong or their associates were supposedly able to access a police vault remains unclear.

However, police have arrested two men, aged in their 40s, in connection with the incident.

Dong-a Ilbo noted that a former Gangnam Police Station investigator, who was in charge of the crypto exchange hacking investigation at the time, was jailed in August for 18 months for bribery.

A court in Seoul heard that a company connected with the probe had offered money to the investigation “in exchange for ensuring the investigation proceeded in their favour.”

Police have refused to publicly confirm or deny the veracity of the report.

“The specific circumstances of this incident, including the manner by which the Bitcoin was leaked externally, are currently under investigation,” a police official told South Korean newspaper Chosun Ilbo.

Tim Alper is a News Correspondent at DL News. Got a tip? Email him at [email protected].