User Who Sold Erroneously Deposited Bitcoins to Repay Debt and Fund Entertainment... What Did the Supreme Court Decide in 2021? [Legal Issue Check]

On February 6, during the process of paying out a total reward of 620,000 won to 249 winners of a random box event, the virtual asset exchange Bithumb experienced an incident in which, due to an employee’s input error in the payment unit, 620,000 bitcoins were paid out instead.

Bithumb blocked trading and withdrawals from the accounts that had received the erroneous bitcoin payments 35 minutes after the incident occurred, but by then more than 80 winners had already sold 1,788 bitcoins. As of the early hours of the 7th, 125 bitcoins (with a market value of about 13 billion won) had not been recovered. Of the proceeds from the sold bitcoins, approximately 3 billion won had been transferred to personal accounts, and about 10 billion won was reportedly used to purchase other coins.

There is virtually no dispute that the winners who disposed of the erroneously paid bitcoins by cashing them out or using them to purchase other coins bear liability for unjust enrichment under the Civil Act.

Legal Community Split Over Whether Embezzlement and Breach of Trust Are Established

However, even within the legal community, opinions are divided on whether criminal punishment is possible on charges such as embezzlement or breach of trust.

First, legal professionals who believe punishment will be difficult cite as their primary ground the fact that in a similar case in 2021 the Supreme Court denied the establishment of embezzlement and breach of trust, and that it has maintained that position ever since.

They also point out that after that ruling was handed down, provisions on “virtual assets” were added to the Act on Reporting and Using Specified Financial Transaction Information (the Act on Specified Financial Transaction Information), which was enacted for the purpose of preventing money laundering, and the Act on the Protection of Virtual Asset Users, which was enacted to protect virtual asset users’ assets and regulate unfair trading practices. However, unlike the proposed Basic Act on Digital Assets, which is currently under legislative consideration and explicitly defines digital assets as regulated financial products, these laws do not explicitly do so, and therefore it is considered unlikely that the Supreme Court’s existing position will change.

On the other hand, a significant number of legal professionals take the view that the enactment of the Act on the Protection of Virtual Asset Users to step in and protect users means that the government has recognized the property value of virtual assets. Taking into account the reality that the United States and the Korean government recognize virtual assets as having economic substance, and recent Supreme Court rulings that recognize virtual assets held by exchanges as subject to seizure, they believe the Supreme Court’s position denying the establishment of embezzlement and breach of trust could be revised.

Reviewing the reasons why the Supreme Court denied the establishment of embezzlement and breach of trust five years ago is expected to help predict whether the subsequent changes in circumstances are sufficient to lead to a change in the Court’s view.

One noteworthy point in assessing the legal liability of the winners in the present case who disposed of the erroneously paid bitcoins without returning them is that Bithumb had originally announced the prize money as between 2,000 won and 50,000 won per person. Given that the announced prize amounts and the value of the erroneously paid bitcoins differ so markedly, it will be difficult for the winners to deny the intent required for embezzlement or breach of trust by claiming that they “mistook it for the prize money” or “did not recognize that the deposit was erroneous.”

199.994 Bitcoins Erroneously Deposited Were Moved to Other Accounts and Partially Exchanged and Spent

The case at issue at that time involved approximately 200 bitcoins owned by a Greek national, A, being mistakenly transferred to B, who was living in Pyeongtaek, Gyeonggi Province.

On June 20, 2018, B, by unknown means, received 199.999 bitcoins that had been in A’s virtual wallet at a certain virtual asset exchange, transferring them into B’s own account. On June 21, 2018, the following day, B transferred 29.998 bitcoins and 169.996 bitcoins, respectively, to two other accounts held in B’s name, then exchanged 2 bitcoins for about 15 million won, and five days later, on June 26, 2018, exchanged 1 bitcoin for about 7 million won. B used the exchanged funds to repay personal loan debts and for entertainment expenses, and on July 11, 2018, even after receiving a demand from the exchange’s legal team, which had been notified by A, to return the bitcoins, B refused to comply.

The prosecutor viewed B as having violated the duty of trust under the principle of good faith to keep the erroneously transferred bitcoins intact for return to A, thereby acquiring a total of 199.994 bitcoins and causing A damage equivalent to their market value (about 1,487 million won). On this basis, the prosecutor indicted B on primary charges of embezzlement under the Act on the Aggravated Punishment, etc. of Specific Economic Crimes and, in the alternative, on charges of breach of trust under the same Act.

Embezzlement Charge Dismissed in First and Second Instances: "Virtual Currency Cannot Be Regarded as Property and Is Different from Currency"

The court of first instance acquitted B of the primary charge of embezzlement but found B guilty of the alternative charge of breach of trust, sentencing B to one year and six months in prison.

While embezzlement and breach of trust share the same essence of betraying a relationship of trust, they are distinguished in that embezzlement concerns “property” as its object, whereas breach of trust concerns “property benefits.”

The first-instance court ruled that “Bitcoin, a form of virtual currency, cannot be regarded as ‘property,’ the object of embezzlement,” and therefore found B not guilty of embezzlement. Embezzlement is established when a person who keeps another’s “property” based on a relationship of trust misappropriates that property or refuses to return it.

The court cited the following grounds: ▲ virtual currencies, including bitcoin, do not have a physical existence occupying a certain mass and space in the natural physical world and therefore cannot be considered “tangible things”; ▲ the “control” referred to in “controllable energy” included within “things” under the Civil Act means physical control only, whereas virtual currencies should be viewed as objects of administrative control; and ▲ unlike deposit claims, for which the Supreme Court has recognized the establishment of embezzlement in cases of mistaken remittance, it is difficult to evaluate the mere acquisition of virtual currency as legal control over a specific amount of money corresponding to the trading price.

In cases of mistaken remittance, what the account holder directly acquires is a “deposit claim” against the receiving bank. However, because in commercial practice deposits are generally treated as equivalent to cash, and funds in an account in the form of a deposit claim can easily be withdrawn as money, it can be considered that the account holder legally controls the remitted funds themselves in the form of a deposit. The court held that virtual currency cannot easily be viewed in the same way.

The court stated that “it is undeniable that various virtual currencies, including bitcoin, have emerged and are in fact being traded with considerable liquidity,” but added that “virtual currency has not been granted legal tender status by the state, and its legal nature has not even been properly defined.”

The court further noted that “whereas a deposit claim represents and corresponds to a fixed-value legal tender in the amount stated on its face, the price of virtual currency fluctuates constantly, varies from one exchange to another, and, due to the nature of virtual currency, which lacks intrinsic value, there is no ruling out the possibility that its value could converge to zero depending on demand. Therefore, merely by holding virtual currency, it cannot be said that payment of an amount of money corresponding to a specific value is necessarily guaranteed through other counterparties or exchanges. Accordingly, it is difficult to evaluate the mere acquisition of virtual currency as legal control over a specific amount of money corresponding to its trading price.”

The first-instance judgment on the embezzlement charge was upheld in both the second instance and by the Supreme Court.

On the 8th, citizens were coming and going in front of the Bithumb Lounge Samseong branch in Gangnam-gu, Seoul. Yonhap News

Breach of Trust Conviction Upheld in First and Second Instances: "No Reason to View Need for Protection Differently from Mistaken Remittance"

Meanwhile, the court of first instance found B guilty of breach of trust. Breach of trust is established when a person who handles another’s affairs, by committing an act in violation of that duty, obtains a property benefit and causes loss to the principal.

The court reasoned that: ▲ from an economic standpoint, since virtual currencies, including bitcoin, are being traded with considerable liquidity as a type of investment vehicle or means of payment, they have property value; ▲ in the absence of any legal relationship between B and A that would justify the transfer of bitcoins, the fact that B, by unknown means, came to receive and hold A’s bitcoins means that these bitcoins are of a nature that must be returned as unjust enrichment; and ▲ there is no reason to view differently from “mistaken remittance” cases the need to afford criminal law protection to the victim’s property by recognizing a trust relationship based on the principle of good faith.

The appellate court likewise found B guilty of breach of trust. The appellate court stated, “It is reasonable to regard the defendant as bearing a duty to protect and manage the victim’s property, such as by keeping the transferred bitcoins intact for return to the owner based on the principle of good faith, and therefore the defendant falls under ‘a person who handles another’s affairs,’ the subject of the crime of breach of trust.”

The appellate court dismissed both B’s appeal and the prosecutor’s appeal.

Supreme Court, Seocho-gu, Seoul. Yonhap News

Supreme Court Also Finds No Breach of Trust: "Analogical Application of Embezzlement Precedent on Mistaken Remittance Violates the Principle of Legality"

The Supreme Court, however, reached a different conclusion. It quashed and remanded the appellate judgment that had found B guilty of breach of trust, holding that the lower court had erred in its understanding of the legal doctrine concerning the subject of breach of trust, namely “a person who handles another’s affairs.”

The Supreme Court acknowledged that “where virtual assets are transferred to another person’s virtual asset wallet without legal cause due to a mistake by the virtual asset right holder or an error in the virtual asset operating system, the recipient may be under an obligation to return unjust enrichment to the virtual asset right holder,” recognizing that such cases can be the subject of a claim for return of unjust enrichment under the Civil Act.

However, the Supreme Court stated, “This is no more than a civil debt between the parties, and such circumstances alone do not place the recipient of the virtual assets in a position of preserving or managing the virtual assets based on a relationship of trust.”

The Court added, “In cases where virtual assets are received, it is not easy to recognize a relationship of trust between the victim and the defendant.”

The Supreme Court held that “virtual assets are information digitally representing economic value granted by encrypted distributed ledgers such as blockchain without state control, and thus constitute property benefits,” and continued, “Virtual assets are distinguishable from ordinary assets in that only the address of the electronic wallet in which they were held can be identified, without knowing the personal details of the person using that address, and because transaction records are distributed, a person other than the parties must participate when sending them to another account.”

The Court went on to state, “To date, virtual assets have not been regulated in the same way as legal tender under the relevant laws, nor are they treated the same as legal tender, and their trading involves risks. Therefore, when applying the Criminal Act, there is no need to protect them in the same manner as legal tender.”

Finally, the Supreme Court concluded, “In the current situation, where there is no explicit provision criminalizing the conduct of a person who, without known cause, receives virtual assets, which constitute property benefits, and then uses or disposes of them, it violates the principle of legality to analogically apply the precedent recognizing the establishment of embezzlement in mistaken remittance cases and, based on the principle of good faith, punish the defendant for breach of trust.”

Subsequently, in June 2022, the Suwon High Court, acting as the court of remand, quashed the first-instance judgment that had found B guilty of breach of trust and acquitted B on all counts in accordance with the Supreme Court’s remand instructions.