The Digital After Life... of cryptocurrencies

The Digital After Life... of cryptocurrencies

A friend asked me the other day what she should do to make sure her cryptocurrency holding was dealt with properly if she died. She's way younger than me, but "you never know", she said.

Back in late 2010 when I started thinking about what happens to digital assets when we die, the cryptocurrency bitcoin was just a baby. Lazlo Hanyecz's purchase of a couple of pizzas for 10,000 BTC in May 2010 (i.e. 10,000 BTC = US$41) was the first recorded real world transaction using bitcoin, giving rise to the bitcoin pizza day celebrated each year on 22 May. On bitcoin pizza day 2017 those 10,000 BTC pizzas were worth over US$20 million and they're currently worth well over US$100 million.When I presented on digital legacies at the NDF Conference in 2014 though, cryptocurrency was still not mainstream.All that has changed, especially over the last 2 years. Bitcoin itself has exploded. There has also been a deluge of so called altcoin initial coin offerings where alternative cryptocurrencies have been created and are now held as investments, traded like FX for fiat currencies, used as tokens for goods or services provided by the offeror, or exchanged for goods or services "in real life".This means that more and more people are becoming very wealthy as their holdings of cryptocurrency increase in value (at least on paper). Of course, the reverse happens as well with high volatility and even complete disintegration of altcoins. But that is another story. What is clear is that cryptocurrency is here to stay and has a potentially significant value in a deceased person's estate.Taxation authorities in many jurisdictions have classed cryptocurrency as an asset although the IRD in New Zealand has yet to issue any formal guidance. High volatility in the absence of an asset agnostic capital gains tax is a challenge for tax law, which may be why New Zealand is lagging behind on this compared to say the US or Australia. On another front however, the New Zealand Supreme Court in Dixon has held that digital files are property (albeit in a criminal law context). I do not think there is any real doubt that cryptocurrencies will be treated as personal property.The purpose of this note is therefore to highlight how important it is for people to deal specifically with any cryptocurrency in their estate planning, whether that be formally in a will, or informally, in a memorandum of wishes.In particular, the distributed peer to peer nature of the blockchain technology that underlies cryptocurrencies means that because generally there will not be a central authority like a bank, dealing with cryptocurrency after you die often will be very much a self-help exercise for executors. They will literally have to take any actions required, themselves. Also, because of the volatile changes in value, if the cryptocurrency is to be distributed to beneficiaries or exchanged for fiat currency, timing may be critical. Your executors need to know what to do, quickly.If you have cryptocurrency, here are three things that are important (there are others, but these are top of my list):

  1. Leave a record of it in your will, memorandum of wishes or list of important assets, rather than just hoping that next of kin or executors will discover your digital wallet. How bad would it be to discover many years after an estate was wound up that a significant holding of cryptocurrency had been forgotten, or, worse still, if it is never found.
  2. As with any other important asset, consider how it is to be distributed if you die. Maybe you're happy for it just to be part of your general estate and therefore treated the same as all other assets under your will, but, given that cryptocurrency may be your single most valuable asset, it's worth thinking about that carefully. Where large sums are involved, unfortunately, a lack of clarity can lead to family disputes.
  3. Most importantly from a practical perspective, you must make sure someone has access to your private key (a long string of characters and numbers). Your executors need to understand that blockchain relies on cryptography, which means that full access and transaction rights require both a public key and a private key. Without both, the cryptocurrency is just a bunch of valueless 1s and 0s. The converse is true however - generally, whoever has the private key will be able to do whatever they like with your cryptocurrency so you need to be careful who has the key. Instructions should therefore be left with your executors how they can gain access to the private key. That might be via an online secure password facility if you regard those as secure enough, or in an old school sealed envelope in a bank vault, or kept with instructions and your will at your solicitors. Whatever you feel comfortable is secure enough. But, you need to do something. There's no ghostbuster service for your private keys - if no-one has access to them when you die, there's no-one to call.

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