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Safeguarding Cryptocurrency Assets for the Next Generation

attorney
Jan 11, 2018

The days of inherited monies purely being measured in dollars and cents is quickly fading away. In recent years, a rapid uprising of digital currencies, known as “cryptocurrencies”, has led to more dynamic portfolios for investors in the currencies. These cryptocurrencies are purely digital and open-source— and do not rely on the authority of a central bank or require an intermediary to be exchanged. One of the first, and arguably the most popular of these cryptocurrencies is Bitcoin. Bitcoin is embedded in a cryptographic system that helps protect investors’ assets stored on the platform. These Bitcoins are stored in a virtual wallet, and transactions made by Bitcoin are verified and inputted into a blockchain, a public file that records Bitcoin transactions.

Bitcoin has become increasingly popular over the past few years due to its security and its digital, open-source nature.

Bitcoin, estimated market size

$70 billion USD [1]

September 2017

As a result, it has become a very lucrative investment, growing nearly 5 million percent in just seven years.

1 Bitcoin =

0.29 USD [2]

December 2010

1 Bitcoin =

$14,421.62 USD [2]

December 2017

While all these cryptographic innovations make Bitcoin and other cryptocurrencies secure vehicles for assets and promising means of investment, the private nature of cryptocurrencies means transferring the assets to inheritors is not “automatic” upon the death of a cryptocurrency investor. This is because cryptocurrency assets— the digital money stored in a wallet— are stored in a “private key”, a random string of alphanumeric characters [1]. Hence the name, these keys are private, and only the person who set up the key, or someone who knows the key, can access the assets.

A sample Bitcoin private key [3]:

E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262

This privatization of cryptocurrency access can make it tricky if an owner of cryptocurrency assets passes away. If inheritors or executors of the cryptocurrency user’s estate do not have access to that private key, they will never be able to access the digital money that the user left for them upon death. With the astronomical growth of Bitcoin and other cryptocurrencies in recent years, this can mean heirs could miss out on thousands or even millions of dollars worth of cryptocurrency.

The private nature of cryptocurrencies can also cause some other problems relating to the transfer of wealth to heirs. Many cryptocurrency users, deliberately or otherwise, leave out their cryptocurrency assets in their will. Often times this creates a level of uncertainty as to how they are to be dealt with upon death. Additionally, heirs may not know of the existence of such cryptocurrency assets, and these assets may go unnoticed for years.

The solution to this problem is actually quite trivial. To begin any transfer of wealth, involving any assets, an estate plan is recommended. The owner of the estate, prior to death, would need to create a will, or some estate plan, drafted by a professional, in order to safeguard the owner’s assets and transfer them to their heirs upon death. Once this estate plan is ratified, the owner can choose to include their cryptocurrency assets as an inheritance for their heirs. Since cryptocurrency is defended with private keys, the owner would need to devise some medium in order to transfer that private key to their heirs. There are a number of ways to accomplish this. The key can be simply written down, or stored on a flash drive or some type of memory device. Some users may even choose to use a third-party service to manage their private keys.

Some cryptocurrency investors may already have an estate plan set up. In that case, the owner would be advised to amend that estate plan to include their cryptocurrency assets, and decide on a way to transfer their private key to heirs upon death. Even if the private key is stored in some place, accessible to heirs, many heirs may end up discarding or ignoring these keys, inadvertently, not knowing that these keys can unlock thousands (if not millions) of dollars in assets. While it is possible for heirs to discover cryptocurrency assets down the line if they are not mentioned, making clear of the existence of cryptocurrency assets in an estate plan is a great way to reduce any uncertainty that may arise with the transfer of wealth to heirs.

With the unbelievable growth and explosion of Bitcoin and other cryptocurrencies, investing in them has gone from a fun experiment to a serious source of wealth for many. Cryptocurrencies have transformed portfolios and changed the dynamic of our global economy, and making sure that these assets are protected is incredibly important. Owners of cryptocurrencies are advised to safeguard their assets so they are guaranteed to transfer to their families and other heirs— and ultimately it is strongly recommended that a solid, concise estate plan exists— one that explicitly denotes cryptocurrency assets and has a way to retrieve those assets.

To create an estate plan, contact our office for a complimentary initial consult HERE. Velasco Law Group is located in Long Beach, Downey and Irvine. We have a team of attorneys who are able to provide services in English and Spanish.

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