By Legal Futures Associate Estate Research
Cryptocurrency and digital assets are the assets of the future. But how can they be valued, regulated and retained? In this new online world, solicitors must understand how these assets will affect wills and how to value them and include them in final estate accounts. Hundreds of millions of pounds have been lost by will beneficiaries worldwide due to lost passwords and login details.
One thing is for sure – cryptocurrency and digital assets are here to stay. Last year Bitcoin hit a watershed mark of 150 million users, and today, in the UK alone, over 4 million adults own cryptocurrency.
The crypto sector is generally unregulated. Since the start of this year, there have also been some big names moving into the crypto space. Porsche has launched their NFT collection, and Siemens has launched a 60-million-euro digital bond on the polygon blockchain.
First of all, let’s get our definitions straight. For something to be considered a digital asset, it has to have three elements – First, it must be in binary form. Secondly, it needs to be uniquely identifiable so that the fundamental idea of a transaction can take place. Thirdly, it has to have some value to be an asset. This may not necessarily be financial. For example, a treasured digital photograph may not be financially valuable but may have great emotional value.
Crypto assets also need to be properly defined. HMRC has developed four definitions – Exchange Tokens, which are native cryptocurrencies. They are the cryptocurrencies that arise from blockchains, and Bitcoin and Aetherium are two of the largest blockchains. Then there are Utility Tokens used in the play to win games – two examples given by HMRC are blockchain and cloud storage. Securities Tokens derive their values from an external source, like stocks and shares. And then there are Stable Coins, which are pegged to an external asset, like fiat currencies or sterling dollar, euro, or precious metals. Many of the stablecoins on the market are pegged to the US dollar, which gives them backing and a little bit more reassurance, although they can be just as volatile as other types.
NFTs, or non-fungible tokens, are often represented as artwork. There can be copyright and ownership issues around these, but they are popular, and there are millions of pounds worth of value within those assets. So, if people are holding them, we need to be aware of what they’ve got and its value. This year, an NFT artwork was sold for $69 million. An NFT is unique. It can be copied, like any digital file, but the central idea is that one person can own it. But even that isn’t simple – artists can retain some rights after selling an NFT, for example, royalty rights for a sale or transfer, copyright, or reproduction rights. So, with regards to an estate with an NFT – that has decided to sell the NFT, those involved have to be aware of what exactly they’re selling and the complexities of how it might be valued.
In law, there are two types of property. The first is real property – bricks and mortar and rights and interest in land. The second is personal possessions, of which there are two types. The first is ‘chose in possession’, which is something physical you own, and there is also ‘chose in action’, which is a future right to claim something. The problem is that cryptocurrency doesn’t fall into either category. Thankfully, the courts have acknowledged they need some jurisdiction over this and have decided that crypto assets fall within the ‘chose in action’ category.
So now, at least, they fall within the Administration of Estates Act 1925, so cryptocurrency can be legally considered personal possessions.
But how to access these assets is a crucial piece of information that needs to be considered in wills. Bitcoins are kept in a private wallet, a physical device or a programme, and this wallet has a private key of 64 characters, and whoever knows the private key controls the Bitcoin there.
The key could be printed out and stored with a copy of a will, stored in a bank deposit box, or similar. The risks here are simple – if the building burns down, the key is lost. It could also be stored on a USB stick, but this can be corrupted or damaged. It’s possible to have a seed backup – which uses a password to recover access. A third-party exchange could be used, but this also has its risk. A case in point is the Quadriga scandal in Canada. Gerald Cotton ran the most significant Bitcoin exchange in Canada. He ran his business from his MacBook Pro, which he carried with him. He was the only person with passwords to the accounts holding all the funds in cryptocurrency and cash. He was well known – people flocked to invest in him, and he had about a quarter of a billion US dollars. He then went on holiday and died abroad. The company appointed to administer the fund accidentally sent a million dollars to a wallet that couldn’t be recovered, and the money was lost. If you are using a third-party exchange, it’s a matter of who you trust. This system is not always guaranteed to be safe.
So, what does this mean for private client practitioners?
Solicitors must know their clients – a good idea is to ask them to complete a digital inventory – is there any paperwork they have gathered about their cryptocurrencies and/or digital presence that could be useful? Also, all their devices and chargers should be safeguarded.
Section 25 of the Administration of Estates Act considers the duty of an appointed representative. This section says you will get in and collect the real and personal estate of the deceased and administer it according to the law. So, your mission is to manage all these different assets. This ties in with the computer misuse act of 1990. The Computer Misuse Act 1990 was brought in purely because of Prince Philip. Back in the 80s, someone tried to hack his email. They were arrested and charged, and in the end, they weren’t actually committing an offence. The law had yet to keep up with things so that they couldn’t be convicted of anything. This led to the creation of the Computer Misuse Act. In this, a person is guilty of an offence if they cause a computer to perform any function with the intention to secure access to any program or data held in any computer or enable any such unauthorised access to be secured, and the user is aware that it is unauthorised. So, trying to access a person’s computer post-death can be an offence.
The best course of action would be for the testator to leave clear instructions about what they want to happen regarding all their digital assets – pass that onto someone else, delete data from this device, where passwords etc., can be found, and so on. Alternatively, has your client considered utilising options that the larger tech companies are beginning to offer such as Apple’s Digital Legacy program – allowing Apple users to designate one contact to access their Apple accounts when they die.
The best time to engage with such details is at the start – when a client has decided to make a will and feels ready to disclose as much information as possible. If a client knows they may die soon, it would be wise to encourage them to tidy their digital affairs up as much as possible as a matter of priority.
With will drafting, it’s often just a case of treading carefully and cautiously with clients and working out a system with the beneficiaries on board to save problems later.
When it comes to administering an estate where digital assets were perhaps not thought about or included in the deceased’s will, there is the potential for cryptocurrencies with potentially high values to be missed leaving the beneficiaries of the estate with reduced inheritance.
Unfortunately for private client solicitors, there does not yet seem to be a system that allows practitioners to search for such assets. Dominic Hendry, Head of Private Client at Estate Research, says: “As a company, we already recommend solicitors carry out a will search and asset search and offer both as part of our intestacy services. However, with digital and societal changes, I think it is only a matter of time before a platform to search for crypto assets is created and becomes in-demand by every private client firm.”
Until then, Estate Research have hosted three webinars from expert speakers Julie Bell (Read Roper & Read Solicitors ) and Richard Marshall (Hay & Kilner), all on the topic of digital assets and cryptocurrencies. Together they guide a practitioner from basic digital terminology to the practical issues and case examples of dealing with the digital assets and currencies within probate.
Each of the webinars can be viewed for free via the Estate Research Learning Hub:
- Digital Assets – What do I need to know?
- Digital Assets – Dealing with them in practice
- Decrypting Crypto Assets
If you do not have an Estate Research Learning Hub account, you can create one for free https://estateresearchlearninghub.co.uk/
