KHQ Lawyers’ Kimi Shah, Senior Associate in Wills & Estates, discusses the challenges which cryptocurrency presents for estate planning in Australia, with reference to the overseas case of a cryptocurrency exchange founder’s death which rendered clients unable to access CAD$190m in funds.
The founder of a Canadian cryptocurrency exchange suddenly died overseas. His death has left about CAD$190 million (approx. AUD$200 million) of digital currency and tokens inaccessible through the QuadrigaCX exchange, according to court documents filed by his widow.
Digital currency (ie cryptocurrency) is managed by the use of “private keys”. If these keys become lost or forgotten, then you risk it being lost forever. Due to the sudden death of the deceased, no one else was made aware of the private keys in the event of his death. Further, his Will did not leave any instructions on how to access the digital currency upon his death.
What is digital currency?
Cryptocurrency is digital currency. It is an online form of currency that has no central authority to manage or track transactions. Further, transactions are made “peer to peer” with no intermediary such as a bank which results in a fast and reliable method of payment that anyone can use. The downfall is that cryptocurrency requires a lot of security measures such as encryption to prevent any unauthorised use.
Difficulties digital currency presents for estate planning
The basis behind cryptocurrency is that transactions are conducted online, privately and anonymously. However, if the investor were to die, and no one else is aware that they had cryptocurrency, there is a real risk that the asset will be lost forever.
What you need to consider
A simple method of ensuring that your cryptocurrency won’t be lost is to inform your executor of its existence, either personally or by leaving information with your Will such as in a statement of wishes. However, you need to ensure that no private information is actually in your Will as your Will becomes a public document upon obtaining probate. When informing your executor, either personally or by Will, not only will you need to provide information about what currency you hold, but also the “keys” to unlock them.
Other options available
There are also other options available which don’t involve leaving information with your Will.
Standard transactions on currencies such as Bitcoin can be utilised generally by a “single-signature transaction”. This essentially means that only one signature is required to effect transaction – usually from the owner of the private key associated with the currency.
However, an alternative is to have a “multi-signature transaction” also known as a minimum number of signatures (M) out of a number of possible signatories (N). To illustrate:
- you may provide Bitcoin with 5 possible signatories;
- Bitcoin then requires 3 people to sign off before the transaction can be effected;
- you then may nominate a number of executors, or inform your intended beneficiaries, providing each with a key or password;
- upon providing the original death certificate to the cryptocurrency fund, the third party could sign off to confirm the transaction.
Dead Man’s Switch
Another option is referred to the Dead Man’s Switch. This occurs where an event triggers a transfer of your cryptocurrency such as your death. This method uses a programme to send you regular emails and waits for your response. Further, as a security measure, it also checks various databases to see if your death certificate appears.
If you don’t respond to the emails and a death certificate is located, then this activates the “switch” and signs the transaction to transfer your currency to your nominate beneficiaries.
This method does require you to regularly check your emails and respond.
Smart contracts refers to a computer protocol which is intended to facilitate, verify and enforce a transaction. With this method, you input a time in the future (ie 6 months, 12 months) that the transaction is to take place. This time is continually postponed by you when you are alive. However, if you die and the time stipulated rolls over, then the transaction will be processed, transferring your currency to your beneficiaries.
This method requires you to regularly postpone the time for the transaction to be processed.
Shamir’s Secret Sharing
Cryptocurrency is held in a digital wallet. To access this wallet, you have to have a “key” or password. Shamir’s secret sharing (also known as a sharing scheme) allows you to divide this “key” into a number of pieces. You can then give each piece to different beneficiaries. For the “key” to be reconstructed, you require all the different parts. Thus, all beneficiaries will need to cooperate to reconstruct the “key”.
Google’s Inactive Account Manager
If you have an account with Google, then Google has a feature called the Inactive Account Manager. This is a way for users to share parts of their account data or to notify your executor or beneficiaries if your account has been inactive for some time.
If Google detects inactivity, you can set up that Google notifies selected contacts and share data with them. You can utilise this function to send your executor or beneficiaries with and an encrypted file with the “key” to access your cryptocurrency.
This method requires you to be active on your account.
Kimi Shah is a Senior Associate in the KHQ Wills & Estates Team and a member of the of the Society of Trust and Estates Practitioners. She has invaluable experience in all aspects of succession law including estate planning, wills and powers of attorney, trust reviews, administering deceased estates and estate litigation. Her broad experience allows her to advise clients on ways to minimise risk and plan for the future. Kimi’s client base ranges from families and small managed entities to high net wealth individuals and she approaches each matter in a holistic manner to provide simple, easy to understand solutions. Kimi is currently undertaking her Masters in Applied Law (Wills & Estates). Her passion for succession law is evident to her clients and colleagues alike. Contact Kimi at firstname.lastname@example.org or connect via LinkedIn