“CRYPTO-WHAT?” DIGITAL CURRENCY IN ESTATE PLANNING
August 24, 2017
Cryptocurrency exists in an intriguing online world, partly because it was borne out of code cracking activities in World War II. While it’s a fairly new development, it is becoming an increasingly popular investment and now it appears that cryptocurrency will, before too long, cement its place in wills and estate planning.
Here’s what you need to know.
What is cryptocurrency?
Cryptocurrency is a digital currency. It exists online and not in physical form, meaning that there are no coins or notes. Security is a huge issue for digital currency, so the currency is encrypted to prevent unauthorised access and use.
Cryptography is used to secure the currency. Cryptography came about during World War II as a means of safeguarding highly sensitive communications. This was, in fact, the premise of the film The Imitation Game.
Key features of cryptocurrency include:
- Funds are controlled by code, rather than by a banking institution.
- Users can make payments and store money using an encrypted code. They don’t need to use their names.
- Blockchain underpins cryptocurrency. It is a type of ledger that records all transactions.
- An individual must produce an electronic signature to show that they have made a transaction.
The biggest and most well known cryptocurrency provider is Bitcoin, although there are now more than 900 different types of cryptocurrencies throughout the world. It is estimated that Bitcoin alone is worth around $45 billion. The cryptocurrency industry is currently worth around $101 billion and is growing exponentially.
Some reasons for this are that there are no fees and it is free from government control. Transactions can be made privately and anonymously, although there is come concern that this attracts illegal activity.
Cryptocurrency users can store and spend their money using virtual wallets, which are encrypted and so are considered highly secure.
Other advantages of cryptocurrency are that the transactions can’t be faked or reversed and it’s accessible to everyone .
Cryptocurrency and estate planning
As the popularity of cryptocurrency increases, it is set to permeate other aspects of life. In legal circles, the possibilities for cryptocurrency are particularly interesting.
We are starting to see cryptocurrency as an asset in deceased estates. For example, a person makes a will leaving all of their assets to their children, the beneficiaries. That person dies and then the executor must locate all of the assets of the estate to distribute to the beneficiaries. Cryptocurrencies form a substantial part of the asset pool. The executor must then work out how to distribute them. If the executor doesn’t have access to the encrypted codes and electronic signatures, this task becomes extremely difficult and may cause significant delays in the granting of probate and the distribution of the estate.
This means that if you hold cryptocurrency assets, you need to consider carefully your estate planning needs to ensure that after your death:
- Your cryptocurrencies are able to be transferred to your beneficiaries; and
- There are no delays in the administration of your estate.
Drawing a roadmap
The simplest way of dealing with your cryptocurrency assets is to make sure that your executor knows about them.
You may need to store information about these assets with your will or give them to your executor in advance. Two issues arise:
- You will need to choose an executor who knows about this type of technology, or who knows how to access assistance to deal with it. The executor will need to be able to identify your digital assets and will need to know how to unlock them. They also need to be able to transfer the asset to the beneficiaries.
- If you store the asset information with the will, you need to ensure that the information is secure. Not only will you need to provide information about where to find the assets, but also the keys that are needed to unlock them. It is important that you don’t write the private keys into the will itself because the will becomes a public document after probate is granted, which means that theoretically, the will can be accessed by anyone.
Storing important asset information with your will can cause other concerns. If someone were to discover and somehow misuse that information, you could be vulnerable to asset theft. Thankfully, some other options are available.
Safety deposit boxes
Even though cryptocurrency is designed to free people from being tied to banking institutions, there’s no doubt that good, old-fashioned bank safety deposit boxes continue to perform a valuable service. The passwords and keys can be stored on a hard drive or on USB stick, which can be physically stored in a safety deposit box.
If you choose this option, you should make a memorandum that says where the information is stored. This should be kept with your will. You should also make sure your executor knows where to find the information and how to access the safety deposit box (for example, they may need to know where the key is located).
One of the most efficient ways of transferring your digital assets to your beneficiaries may be to make the transfer itself a digital process. There are a number of ways to achieve this.
One option is for multiple signature transactions. In Bitcoin, this is known as M-of-N transactions. A minimum number of signatures are required (‘M’) out of the number off possible signatories that you have provided (‘N’). For example, you might provide Bitcoin with the names of five possible signatories. Bitcoin then requires a minimum of three of those people to sign before the transfer of the asset.
The signatories could be the intended beneficiary, or a third party such as your estate planning lawyer. Upon providing the original death certificate to the cryptocurrency fund, the third party could sign off to confirm the transaction.
Dead Man’s Switch
Another option is for an event to trigger a transfer. Bitcoin calls this the Dead Man’s Switch method. This method uses a computer programme to check whether you have passed away. The programme sends regular emails to you and waits for a response. It can also check death certificate databases.
If you don’t respond to the emails and then if your death certificate is located by the programme, it activates a switch and signs the transaction. The asset transfers to the beneficiary.
Checking the death certificate acts as a safety net to ensure that there’s no mistake if you failed to respond to an email. However, this system does require vigilance on your part to regularly check for and respond to emails. You must also ensure that if your email address changes, you contact the fund immediately and update your details. Similarly, if you have ongoing technical issues with your email account or with internet access, you will need to inform your fund.
Smart contracts can be used. They are also known in Bitcoin as Lock Time Transactions. This method requires you to identify a time at which the transfer of the asset is to occur. You then need to continually reset or postpone the transaction. Upon your death, the transaction will be made on the date to which it was postponed. Again this method requires some vigilance on your part to continue to reset the transfer date when prompted.
A sharing scheme allows you to divide your digital wallet into a number of pieces. You give the pieces to whomever you choose, for example your beneficiaries. For the asset to transfer, all of those people must put their pieces together. This means that after your death, your beneficiaries can collectively decide to put the pieces together to trigger the transfer of the asset.
The biggest risk associated with this method is that a piece may be lost, which means that no one can benefit. Also, if the beneficiaries can’t agree on when or if the unlock the wallet, it may mean that the asset can’t be transferred.
What does it mean?
When you really think about it, it was inevitable that virtual money and digital currency would find its way into our everyday lives. After all, we have virtual friends due to social media and virtual shopping malls thanks to online retailers. We even have virtual garage sales thanks to eBay and Gumtree.
There’s no doubt that cryptocurrency performs a great service for many people, but it’s also really important that if you decide to invest in digital currency, you think about what will happen to it after your death. This includes getting legal advice on how to manage those assets and how they should be transferred to your beneficiaries after you’re gone.
It’s also really important to understand that if you happen to pass away without leaving details of your cryptocurrency holdings, there’s a real risk that the assets will be lost forever. Even if your executor knows of the assets, it will be almost impossible for them to locate and transfer the assets to your beneficiaries.
Websters Lawyers has a great team of solicitors who are highly experienced in estate planning issues. Contact us today for a free first interview. Because the sooner you act, often the better off you and your loved ones will be.