Since the 2009 launch of Bitcoin, the first cryptocurrency, crypto assets have rapidly gained popularity among investors. Despite their volatility and the well-publicized collapses of several crypto asset platforms during 2022—recall the infamous FTX scandal—crypto assets are here to stay. This is evidenced by the fact that worldwide, there are an estimated 100 million cryptocurrency wallets worth approximately $1.27 trillion (in October 2023).
Anyone can use cryptocurrency, including tech-savvy estate planning clients interested in new ways to diversify their investment portfolios. Therefore, estate planners must become well-informed about the important differences between crypto assets and other assets and adapt their practices to incorporate their clients’ crypto assets into their estate planning.
What Are Crypto Assets?
The US government defines crypto assets as “all types of representations of value or claims in digital form that rely on the use of a method of distributed ledger technology.” Distributed ledger technology (DLT) such as blockchain is “a secure way of conducting and recording transfers of digital assets without the need for a central authority” such as a bank, which uses a centralized rather than a distributed ledger to verify transactions. Each transaction that occurs on the blockchain is verified using a consensus protocol: each block of transactions is cryptographically linked to the previous block, so other users are alerted to and verify the transactions. A blockchain is like a list of every transaction that has ever occurred involving a particular cryptocurrency that is publicly available for anyone to view and verify. When a new transaction occurs and is verified, a new block (or link in the chain) is added to the blockchain.
Blockchains are decentralized because they are not controlled or overseen by a central authority, and in theory, there is no central authority that can reject a transaction or freeze an account. Each transaction can be validated in one of two ways:
- Proof of work. Computers called nodes compete to be the first to solve the algorithm, and the winner receives a reward of new digital currency coins.
- Proof of stake. Individual validators are chosen to validate transactions using their own cryptocurrency as collateral, that is, the number of coins they “stake” or lock, and are rewarded in digital currency.
Two of the most popular crypto assets are cryptocurrency and nonfungible tokens (NFTs). Cryptocurrency is a token that is fungible because each token unit is equal in character and value to other token units, and therefore, each of the units is indistinguishable and interchangeable with other units. In contrast, an NFT is created using software that is unique and therefore is not fungible with other software code.
What Are the Benefits of Having Crypto Assets?
Despite their volatility as an investment, there are benefits to investing in crypto assets that some believe justify the risks. The first benefit is ease of access. Anyone can use or invest in crypto assets with a smartphone, computer, and an internet connection. Other benefits include privacy of transactions (which can generally be completed anonymously); transparency (due to the blockchain, the history of a transaction is recorded, although identities may be kept private); and rapid, secure transactions (cryptocurrencies and crypto assets can be exchanged almost instantaneously via secured transactions without any time lost to transfer processing as is common with traditional fiat currency banking transfers).
Estate Planning Considerations for Crypto Assets
Estate planning for crypto assets is critical. The following are some factors to keep in mind:
- Some laws applicable to cryptocurrency and estate planning have not yet been tested in court.
- Hardware wallet storage could be considered tangible property, while a software wallet may be treated as intangible property. This could be significant when it comes to distributions for estate planning purposes, because access to hardware wallets or computing devices (tangible personal property) may be necessary in order to ensure access to crypto assets. Estate planners must therefore ensure that any intended beneficiary of a crypto asset also receives whatever else may be necessary for access.
- Cryptocurrency generally cannot be jointly owned and cannot have a beneficiary designation. Possession of the key means possession of the asset; advise clients to be careful in choosing a fiduciary.
- Estate plans must communicate where crypto assets are stored and how to access them, but they need to do so in a way that protects privacy and security.
By understanding the unique characteristics and challenges of crypto assets, estate planners can help clients protect these digital investments and ensure their seamless transfer to future generations.
