By Fletcher Day
What happens if someone holds £145 million worth of cryptocurrency, they pass away unexpectedly and they are the only person who has the password to the digital wallet in which funds are stored?
This was the unfortunate reality for the owner of Canada's largest cryptocurrency exchange, Gerald Cotten. It resulted in the Canadian company QuadrigaCX being unable to pay their customers around £41 million worth of Bitcoin.
Security is just one of the many issues surrounding the use of Bitcoin and other digital or virtual currencies called 'altcoins', such as Ethereum, XRP and Litecoin. Apart from security, questions arise including:
- How does one legally own a largely intangible asset?
- How are these assets treated for tax purposes in various jurisdictions; and
- How are such assets treated on death?
Therefore, it is imperative that on death, personal representatives have authorised access to the digital wallet using the correct 'keys'.
This would include a public key which would be available to anyone in the same way as an email address and any private keys which an individual would keep in the same way as a bank account PIN code.
Ultimately, there is no 'one size fits all' in the way these currencies are treated in different countries. However, in the UK, HMRC issued guidance on 3rd March 2014 in an effort to try and get ahead of the curve when it comes to the income tax, VAT and capital gains tax treatment of cryptocurrencies, like Bitcoin.
In that same brief HMRC described cryptocurrencies as having a 'unique identity which cannot be directly compared to any other type of investment'. If this is the case then, can an investment vehicle such as a trust with all of its protection and stability be used to protect these assets which are fluid and unpredictable in their nature? The answer is yes.
There is a benefit of using trust structures in this way. Trustees by virtue of their appointment can retain confidential information about digital wallets such as passwords and if a sound letter of wishes is prepared before death, then this could provide invaluable guidance to the trustees as to how the cryptocurrencies are to be invested, or which beneficiaries are to inherit.
As of 2019, cryptocurrencies are well and truly established for their purchasing power and as an investment tool and it looks as though they are here to stay.
With individuals passing away with the potential of having such assets within their estates on death, this is where a professional trustee can help.
Professional trustees appointed in a Will can come with a wealth of knowledge and experience in dealing with obscure assets. They are more than likely to have contacts within wealth management and financial advisors who deal with such assets specifically upon death.
This can prove for a smooth running of the estate administration on death and mean that it does not run on for months and months, or even years if lay executors are unsure of what to do.