From Nov. 1, South Korean courts can freeze and sell cryptocurrency to satisfy civil debts. Exchange-held claims are easier to enforce; self-custodied assets may remain harder to reach.
On Oct. 12, the Supreme Court promulgated Rule 3280. It sets procedures for virtual assets held by exchanges and for crypto kept in private wallets. The rules take effect Nov. 1.
Exchange-held crypto
For assets held by an exchange or another custodian, the rules distinguish the cryptocurrency from a customer's right to demand its transfer. A creditor can ask a court to attach that claim. This brings the customer's entitlement into the debt-enforcement process without requiring the creditor or a bank to take the crypto directly.
For exchange-held crypto, the court can attach the customer's right to demand transfer of the asset-not necessarily transfer the cryptocurrency directly to the creditor.
Once served with an attachment order, the custodian must block transfers of the covered assets to the debtor. The debtor is also barred from disposing of the claim or receiving the cryptocurrency.
Creditors may ask custodians for information through a court procedure. A custodian that receives the order must say whether it recognizes the debtor's claim. It must identify the type and amount of cryptocurrency held. The response must also disclose whether other creditors have claims or priority rights.
Custodians have one week after receiving a disclosure order to respond. That information can show what assets are available for repayment and whether another creditor has a competing claim.
Jeonbuk Bank's reported corporate lending scheme uses bitcoin held by a specialist third-party custodian as collateral. If a borrower defaults, the bank is expected to rely on a court-supervised sale to convert the bitcoin into money for repayment, rather than receiving the cryptocurrency directly.
Cointelegraph has also reported that the framework underpins Jeonbuk Bank's corporate loans in won secured by bitcoin. In the reported arrangement, a specialist third-party custodian holds the bitcoin. If a borrower defaults, a court-supervised sale would convert the collateral into money; the bank would not receive the bitcoin directly.
Private keys remain a barrier
For cryptocurrency held directly by a debtor, a court can prohibit transfers and order delivery of the assets to an enforcement officer. The officer may take possession before the debtor receives formal notice of the attachment order. If the officer receives the crypto first, the attachment takes effect upon receipt.
That timing lets enforcement officers act before notice gives a debtor the chance to move assets. But the order does not provide the private keys needed to authorize a transaction. When a debtor controls those keys and refuses to deliver the assets, enforcement can be harder than an attachment served on an exchange.
The issue differs from the one in the Bybit case, which involved U.S. authorities using blockchain tracing to disrupt efforts to launder stolen crypto. South Korea's framework covers civil debt collection, not the tracing of criminal proceeds.
Valuation and appeals
An attachment restricts a debtor's ability to transfer or receive specified assets while a claim is enforced. It does not itself trigger a sale. Creditors may need separate court authorization to transfer or liquidate the crypto.
A judge may authorize transferring the crypto to the creditor at a court-determined valuation. Alternatively, the judge can direct an enforcement officer to arrange a sale through a virtual asset service provider. The rules also permit a sale through the existing custodian. Crypto may instead be transferred to an officer-controlled account or converted into another asset that is easier to liquidate.
Sales are to use the market price on the transaction date or another appropriate valuation. That gives courts a basis for handling volatile assets, though the sale price may differ from the value when the court first attaches them. Debtors can appeal orders authorizing transfers or sales. Those orders take effect only once final. The rules also provide for returning assets if enforcement is withdrawn or canceled.
The procedures apply to cases already before the courts, including matters with existing attachment or preservation orders. From Nov. 1, custodians handling those cases must follow the new disclosure procedures. They must also comply with the rules for transfers and sales.
