Locked Out: Estate Planning for Bitcoin, AltCoins, & Asset-Tokens
by Pamela Morgan of Empowered Law PLLC;
Do you know if your clients own bitcoin? Or other cryptocurrencies, like ethereum? Or asset-tokens, like Tatiana Coin? If you’re like most lawyers, you have no idea if your clients own these assets. Your clients are unlikely to mention them, especially if they’re not prompted by your asset disclosure sheet, because it’s unlikely they currently represent a large percentage of their net worth. But that could change very soon.
As of this writing, bitcoin’s current valuation is near $6 Billion USD, ethereum (the most popular ‘alternative coin, or alt-coin, to bitcoin) just exceeded $1 Billion USD, and many other “blockchain technologies” are being developed with millions of venture capital funding. Yesterday’s play money could be tomorrow’s super asset. These assets are very different from many other assets. By default, most of these assets will not pass to heirs or beneficiaries; they will simply remain locked. Forever. Like gold coins buried in a garden; everyone may know they exist but they’ll probably never be able to cash them out.
Unlike many other assets, there are no fail-safes with these coins and tokens. When assets are held by a bank (or any third party), a court can simply order the bank to give those assets an executor, trustee, or even directly to named heirs. But with assets like bitcoin, a court order is meaningless. Not because these assets are outside of the legal system, as some say, but because there is no one to order. If the assets were owned and controlled by the individual alone, and the decedent did not implement a succession plan, then no one else will be able to unlock the account. There is no one to order because no one has the knowledge or ability to unlock the account. It’s a matter of technology, not will.
Let’s explore the concepts of ownership and control a bit more. For assets like bitcoin, security and ownership are two sides of the same coin (forgive the pun). These assets typically use cryptography, specifically public-private key pairs, to prove ownership and authorize asset transfers. In these systems, I must have my private key in order to “spend” or use my assets. Instead of trusting a third party to secure my assets, they are secured by my private key; my private key is a secret that only I know.
It’s important to keep my private key a secret because anyone who has a copy of it can also spend or use the assets, as if they were the rightful owner. In traditional banking terms, by giving someone else a copy of my private key it’s like adding them to my bank account as a joint-owner. This is undesirable for many reasons. Beyond trusting the joint-owner not to steal my funds, I have to trust them to securely store my private key. If they’ve stored my key on their computer and they get hacked, my assets will probably be stolen. Owners of these assets are unlikely to trust others with their private keys, and they’re right not to. Industry best practice dictates never giving anyone else access to private keys unless there is a compelling reason to do so.
And there is the catch 22. If your client doesn’t share the secret, it’s likely to die with them. If they do, they’re much more likely to lose the asset. Many people’s first instinct is solve the problem the same way we have in the past – by giving it to someone else. In this case, that would mean giving control of the keys to a trusted third party like a bank. On its face this seems to solve the problem, however when there is custody there is theft. There is malfeasance. We strip the true owner of control over their own assets. Most importantly, though, the technology itself provides a much better solution.
Today we are designing systems that provide complete control to the individual while they are alive and well but divided control and access in case of emergency – like death, coma, or traumatic brain injury. By combining hardware, software, process-controls, and contracts, we implement user-friendly, tested plans to be executed by either the executor, trustee, or attorney when the time comes. The plans can be modified at any time and can be incorporated into a larger will or trust document, or operate on a stand-alone basis.
Of course there are many other issues related to protecting these kinds of assets, including price volatility, liquidation valuation, allocations, not to mention taxation! But before you can have those discussions, you must first know if your client owns these types of assets.
Here are three things you can do today to better serve your clients:
- Add a line on your asset disclosure form asking about digital currencies, virtual currencies, or blockchain assets.
- Mention digital currencies, virtual currencies, or blockchain assets in your next newsletter or blog post.
- Use this new information as a tool to reach out to former clients; ask if they need to update their estate planning documents.
This technology will touch almost every practice area, this article highlights just one. It’s an industry with high-growth potential and opportunities for niche practices and practitioners. Learn more about these assets by attending a conference like BlockchainTraining.org or Coala.global that connect lawyers with other professionals in the industry. Empowered Law PLLC, the author’s firm, provides consulting and training services to lawyers and law firms or learn more by visiting CoinCenter, a Washington D.C. based non-profit research and advocacy center focused on cryptocurrencies.
About the author: Pamela Morgan is an attorney, educator, and entrepreneur who has been working exclusively in the bitcoin and blockchain industry since early 2014. She is a widely respected authority on multi-signature governance and legal innovation using digital currencies. Pamela is one of the few attorneys whose knowledge and understanding goes beyond legal theory; she actually uses these technologies everyday. She’s authored numerous “how-to” articles and is known for delivering engaging, practical presentations about her work to audiences around the world.
In addition to her law practice, Pamela is the CEO of Third Key Solutions LLC. Third Key works with clients to design and test asset protection plans, including high-value estate planning, internal corporate governance plans, and disaster recovery plans. Occasionally, Third Key will provide backup key storage as well, as part of a non-controlling multisignature process. Pamela is also a board member of the CryptoCurrency Certification Consortium (C4) a non-profit industry standards organization, where she serves as the Director of Education.