When Bitcoin Can Turn Into ‘No’ Coin: The Importance of Considering Your Cryptocurrency in Estate Planning

Cryptocurrency is a new age investment option that is diversifying the traditional ways in which people would normally trade and invest.

Digital currency such as Bitcoin and Dogecoin has allowed many people to expand their investment portfolios in a way that is fresh and exciting. However, with new concepts, often uncertainty follows it.

Now, you may be wondering, how does this relate to my estate planning or the deceased estate’s process? Well, when considering your assets, cryptocurrency is technically included in your estate pool. It has the ability to be transferable, just like shares. The issues currently faced with cryptocurrency surround the fact that the industry is currently not regulated, meaning, there is no ‘regulatory body’ that one may approach to gain access to cryptocurrency when a cryptocurrency holder, unfortunately, passes away.

It then follows that this can cause major issues if the digital wallet that these currencies are secured in is not accessible for your executors or beneficiaries under your Will when you do pass away. This could potentially result in thousands, hundreds of thousands or even millions of dollars of assets that cannot be accessed and subsequently transferred to your beneficiaries under your estate.

Further, there is also the tug-of-war between ensuring your crypto is accessible and securing it so that there are no unwanted security breaches, especially prior to your passing.

It is therefore crucially important that you consider any digital assets that you hold when you are instructing a lawyer in your estate planning.

The Issue

It is a common misconception that problems with cryptocurrencies (known as “crypto”) lie within their intangibility and the fact that they don’t “physically” exist. However, the primary complication actually lies within their accessibility.

Most people store their crypto in a digital wallet. These digital wallets are password-protected or accessed by ‘keys’. If the executors/beneficiaries of an estate do not have the keys, they will not be able to access the crypto. As a result, the currency may lay dormant in the digital world forever and not be able to be transferred to anyone else. This may result in beneficiaries receiving far less than what you planned to leave for them under your will. This is when your Bitcoin can turn into ‘No’Coin.

Currently, cryptocurrencies are not regulated and there isn’t any ‘body’ to govern access to someone else’s digital wallet. People who invest in cryptocurrencies often use pseudonyms to disguise their identity, which can also contribute to the complexity of finding, accessing, and distributing these assets.

Obviously, if you do have cryptocurrency you can give the keys or your passwords to your digital wallet to someone that you trust, so that your cryptocurrency may be accessed in the event that you pass away. However, this may expose the assets to fraud and security breaches, both before you pass and after (especially if they fall into the wrong hands).

Overcoming the Issue

A common mistake that people make is to write these confidential keys or passwords into their will. But this is the worst solution to the issue and something we would never advise our clients to do because your will can become available to the public during the process of probate and anyone would be able to view the passwords.

There are a few options available for people who wish to keep their cryptocurrency both safe and accessible to their executor or beneficiaries when they pass away. These options may vary depending on your individual circumstances.

1. The first option is to write down your access codes and attach them to your original will if it is stored in safe custody with a law firm. However, if these access codes need to be changed from time to time, you will need to remember to provide the updated access codes to the law firm where your will is held.
2. Another option is to store the access codes in a safety deposit box, either at home or with your preferred bank, and annex a memorandum or letter to your will to indicate that this has been arranged. Again, if these access codes need to be changed from time to time, you will need to remember to put the updated access codes in your safe at home or provide the updated access codes to the bank.
3. There are options in the digital world too, such as the M-of-N/minimum number of signatories required. This is a multi-signature technology that will allow someone to nominate their beneficiaries as alternate signatories but requires all 3 of them to sign for access to be granted. These are a type of digital wallet that can be created by the crypto holder. The crypto holder can assign a number of people to have a key to their crypto, however, access is only granted when the minimum number of people elected are able to ‘sign in’. For example, if you hold crypto in a digital wallet, you can assign 5 people to be ‘keyholders’ to your wallet and require a minimum number of 4 people to access your wallet. Access will only be granted if 4 out of the 5 nominated persons are available to sign in. Multi-signature methods can be useful for added security or estate planning purposes. However, it can cause issues if the signatories are not familiar with the technologies or if something happens to one of the signatories.
4. Bitcoin has a “Dead Man’s Switch”. This allows the programme to contact the crypto holder constantly via email to check if they are still alive by responding. If no response is received, the Bitcoin program will then check a death certificate database. The programme will then automatically switch/transfer the asset to a nominated beneficiary once a death certificate has been located. This is an unreliable system, which should only be used as a backup. It can also cause issues if people use pseudonyms as opposed to their legal names.

The Importance of Legal Advice

In 2019, the NSW Law Reform Commission considered the issues that arise with owning cryptocurrency and identified the need for a regulatory statutory scheme, as well as the introduction of a digital asset register. To date, no further steps have been taken to action this, however, Coutts will continue to monitor and provide updates when relevant.

In the meantime, it is important to advise your lawyers if you hold digital assets when preparing your estate planning documents. By doing so, you will be able to obtain legal advice as to the potential consequences of the distribution of cryptocurrency in your estate planning documents and other factors to consider.  It is also important that if you have been nominated as an executor for a deceased estate that you get the appropriate legal advice regarding cryptocurrency access.

Our wills and estates team at Coutts can assist in both scenarios and provide you with relevant, practical advice to ensure the cryptocurrency isn’t lost.