Crypto assets and estate planning: striking the balance between access and security

Research published by the Financial Conduct Authority (FCA) estimates that 2.3 million adults now hold crypto assets (up from 1.9 million last year) and as many as 78% of adults have now heard of crypto assets, up from 73% in a year.

Cryptocurrency is a digital asset that can be bought, spent, saved or sold in much the same way as traditional assets. The differences between traditional and crypto assets however are the way they are accessed and stored. Crypto assets are secured and traded on decentralized networks based on blockchain technology, which is essentially a public ledger that cannot be changed.

Cryptocurrency, or rather the keys required to access it, are then “stored” in a digital wallet. Cryptocurrencies are transferred from one person to another and secured by the use of public keys and private keys. The owner of cryptocurrency must always have their private keys in order to be able to access their crypto.

The FCA research shows that although owners of crypto assets are increasing the overall understanding of cryptocurrencies is declining, for example only 71% correctly identified the definition of cryptocurrency from a list of statements.

In addition, a survey conducted in 2020 by the Cremation Institute recorded that 89% of it’s 1,150 investor participants are worried about whether their crypto assets would be transferred to their family or friends following their death, with no respondents saying they were “not at all” concerned.

The Institute found that although the majority of crypto holders are concerned about passing on their assets after they die, a large proportion fail to use wills, trusts, or proper instructions for beneficiaries. This lack of preparation, according to the institute, is due to a lack of estate services focusing on crypto assets and a lack of government regulation.

“The problem with crypto assets”

says Sharon Henley, Chief Product Officer at Coincover,

is not the bequeathment of the assets in a Will, that’s the easy part, but rather, the hard part is knowing about, and also having the ability to access, the cryptocurrency in order to transfer it. Millions of pounds worth of crypto currency has been lost forever because owners have died without leaving a contingency plan.”

So in order to access crypto assets, beneficiaries need access to the private key, otherwise it’s almost impossible to retrieve funds. The question facing many investors then, is where should details of the private key be stored?

Given that Wills become a matter of public record once probate is obtained, specifics of keys and other confidential information should not be included in a Will.

“We are all told never to share our passwords, never to share our pin numbers or other such security details – so this should also be the case for a Will … anyone that knows how crypto works could read and use the keys to obtain all the crypto before the rightful beneficiary is able to do so”,

states Henley.

Some investors wonder if leaving details with a lawyer is the best option, but this again presents problems. By doing so would essentially deem the lawyer a custodian and most lawyers are simply not set up for this. Other challenges would include the updating of usernames and passwords, and consideration of two factor authentication, all of which would require very effective administration to be sure that all information is current. Then there is the rather more primitive approach of leaving key details in a safe place such as a USB, hard drive or even a piece of paper for beneficiaries to access, but how safe is this really?

There are however a number of safe ways to ensure that beneficiaries can access crypto assets should the necessity arise.

Firstly the owner can purchase and store cryptocurrency at a cryptocurrency bank and have the bank manage the keys on behalf of the owner.

“The upside is that you just need to leave details of the crypto bank and your account with your loved ones. The downside is that you don’t actually own your cryptocurrency or have control of it if it is stored with a custodian,”

comments Henley.

Secondly, cryptocurrency can be stored online in a non-custodial, multi-sig wallet. Provided the owner enrols on a cryptocurrency inheritance solution scheme, this method allows the owner full control of assets, as well as the option for two independent parties to come together to retrieve the funds if required.

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