Recent Virtual Asset Recovery Issues in South Korea

In the past, methods of compulsory enforcement against real estate, deposits and receivables have mainly been discussed in terms of asset tracing and recovery. In the early 2000s, as investment in financial instruments such as stocks became more prevalent than before, discussions began to focus more on compulsory enforcement against securities than other assets – in particular, how compulsory enforcement procedures should be carried out against stocks that are held under protection for a certain period of time following an IPO.

Since these discussions, regulations concerning compulsory enforcement against securities have been newly established and supplemented in the Korean Civil Execution Act and the Korean Rules of Civil Procedure. As society has advanced and new types of assets and financial investment products have emerged accordingly, laws and rules relating to compulsory enforcement against these new types of assets have been introduced and amended.

When it comes to certain types of virtual assets, security tokens link the value of assets such as stocks, bonds and real estate with tokens. One recent trend in South Korea has been the institutionalisation of the issuance of security tokens and therefore it is necessary to explain some of the compulsory enforcement procedures against securities of this nature.

Compulsory enforcement on stocks varies depending on whether the stock certificates were issued, whether they were deposited or held in custody with the Korea Securities Depository, and whether the debtor possessed the stock certificates.

Since the introduction of the securities alternative settlement system, investors can deposit their securities with securities companies (depositors), which can then deposit the securities deposited by investors with the Korea Securities Depository. When a securities company opens an account in the depositor’s account book at the Korea Securities Depository, the transfer of deposited securities or the establishment of security rights is carried out solely by entry in the books – without issuing securities.

Pursuant to the Capital Market Act, investors and depositors are presumed to have common ownership of deposited securities according to the type and quantity of securities listed in the books. The enforcement procedure is initiated in accordance with the court’s seizure order for common shares in securities and most of the enforcement regulations on receivables are applied mutatis mutandis.

When a large number of stocks are allocated to a third party via listing through an IPO, there is a mandatory protection system that temporarily restricts stock sales by shareholders who meet certain requirements for a certain period of time. It is necessary to be careful because stock certificates that have been placed under protection are not subject to the enforcement method for deposited securities per the Civil Enforcement Rules. In the case of securities held in safe custody, only the obligated custodian (ie, the issuer, representative stock company, or listing broker) can request for return against the Korea Securities Depository, and the owner of securities can request return only against the obligated custodian. Therefore, the third-party debtor – not the Korea Securities Depository – becomes the obligor guarantor.

The above-mentioned securities depository system presumes the existence of securities. In response to the recent introduction of the electronic registration system, which does not presume the existence of securities, the Electronic Securities Act came into effect on 16 September 2019. Following the enforcement of the Electronic Securities Act, listed stocks, etc, are all electronically registered and the Civil Enforcement Rules stipulate the compulsory enforcement method.

The seizure of electronically registered stocks is to prohibit the debtor from transferring electronically registered stocks between accounts, giving notice of cancellation, or disposing of them in other ways. If the debtor is an account management institution, electronic registration is prohibited and – in cases where the debtor is a customer – the account management institution is prohibited from transferring and cancelling accounts containing electronically registered stocks, etc.

Unlike deposit receivables, a collection order or an exclusivity order for electronically registered stocks, etc, is not recognised. For liquidation, upon request of the seizure creditor, an order to transfer electronically registered stocks, etc, a sale order, or an order to wind up by other appropriate methods can be used.

Accordingly, for securities such as stocks, the enforcement procedure varies depending on whether they are electronically registered in accordance with the Electronic Securities Act, whether they are deposited, and whether they exist as physical securities without electronic registration or deposit.

However, since 2017 – as interest in investing in virtual assets such as bitcoin increased in South Korea, along with investment by general investors – discussions on how to enforce and regulate compulsory enforcement against virtual assets have been gradually progressing. In the USA, asset freezing orders and receivership are mentioned as methods of preservation and disposition when it comes to virtual assets. In South Korea, cases where the virtual asset exchange manages the virtual asset and cases where the debtor manages the virtual asset are discussed separately but no precedent has been established as yet. In practice, provisional measures in respect of bitcoin have been carried out in a number of cases and virtual asset exchanges have been regarded as third-party debtors.

In the amended National Tax Collection Act, which came into effect on 1 January 2022, new provisions on the collection procedure for virtual assets were established in the section concerning property rights other than movable assets. However, at the time of writing, there is no clear regulation regarding what kind of enforcement is – and will be – possible against virtual assets.

Many aspects remain unknown, including what kind of enforcement procedure is possible. The method of compulsory enforcement currently varies depending on:

Just as relevant regulations were prepared in the Civil Enforcement Rules through various discussions and practical cases on compulsory enforcement methods whenever a new financial investment product appeared in the past, it is anticipated that scholars and practitioners will accumulate sufficient discussions and precedents for virtual assets in the future.