Many will have seen stories in the news about cryptocurrencies and what can happen when the owner who has sole access to the password dies. The Independent recently reported on the death of Gerald Cotten, the chief executive of the QuadrigaCX exchange, who was believed to have had the only password to £145 million of cryptocurrency.
Rod Smith, partner in the Trusts and Estates team, receives more and more queries on cryptocurrencies and says that, when making a Will, clients should alert executors to the existence of cryptoassets and the public and private keys. This is the best way to ensure the assets won’t be lost and that the wishes relating to the cryptocurrencies can be carried out.
In October 2018 the Cryptoassets Taskforce, constituted by HM Treasury, the Financial Conduct Authority and the Bank of England, published its final report ‘which provides an overview of cryptoassets and the underlying technology, assesses the associated risks and potential benefits, and sets out the path forward with respect to regulation in the UK’.
This was quickly followed, in December 2018, by HMRC’s guidance on the taxation of cryptoassets held by individuals.
Both are interesting and a much-needed step towards clarification from a technical point of view but what about the practical, day-to-day issues facing executors? For this practical guide Rod spoke with Richard Jones of Global Block.
- Rod: If a testator doesn’t mention they have cryptoassets where should executors look?
Richard: If no mention of cryptocurrencies are made it is possible to approach some of the larger exchanges to find out if a deceased person had an account; however, with over 200 crypto exchanges globally there is no guarantee of tracking the assets down especially as people often buy a cryptocurrency on an exchange but store them elsewhere for security.
- Rod: How would an executor access the cryptoassets?
Richard: In order to sell the cryptocurrency, it needs to be transferred to an exchange or sent to a broker like GlobalBlock. We are happy to talk anyone through the process as it differs between hot wallets, cold storage and vault systems. To access a wallet you need both the public and private keys (this is much like a username and password in the non-crypto world). However, there isn’t a centralised exchange from which you can reset your password much like you would on an email account or social media login. Therefore it’s of paramount importance to have a record of the private and public keys stored safely.
- Rod: What evidence will you need to prove ownership and register the cryptoasset in my name if I’m acting as executor?
Richard: In order for a transaction to take place a user will send an amount of cryptocurrency from their wallet address to another wallet address. For that transaction to complete, the network would need to confirm it by consensus and then the entire network will know that the transaction has gone through. The network therefore knows exactly what sits in each wallet address which essentially removes the need for a central registrar. So long as the user has the private key (password) then they have control of that wallet and its contents. I cannot emphasise enough how important the private key is for accessing, controlling and ultimately owning the cryptocurrency in any given wallet.
- Rod: How would I find a buyer?
Richard: Whilst more esoteric cryptocurrencies have less liquidity, the major coins have considerably more; currently Bitcoin liquidity runs to circa $5 billion a day. By using a broker, direct access to many of the large global market makers is possible and this enables you to gain access to prices and execute transactions very easily and with increased speed relative to traditional methods.
- Rod: Do the usual AML procedures apply?
Richard: The cryptocurrency market is not currently regulated as other financial sector which has been a common complaint and barrier to entry for many institutions, hence there is yet to be wider adoption from traditional banks. However, this is something that has been signposted to change by UK regulators in the not too distant future. In the meantime, whilst there is no requirement for due process to be followed, businesses such as ours follow the regulated environment meaning we onboard and trade with clients in the same manner as if we were operating in a regulated environment so, amongst other procedures, we perform full AML and KYC along with source of funds checks on all of our underlying institutional and retail clients.
- Rod: What safeguards are in place to ensure that I receive the sale proceeds? Is this a regulated activity?
Richard: Following on from my previous response and the unregulated nature of the market, we take the time to first assist clients or custodians with the creation of the relevant secure digital wallets which they will solely have access to. We also have a variety of banking arrangements for our clients and segregated accounts which ensure that upon exchange of “coin” (e.g. Bitcoin) into “fiat” (e.g. GBP), the funds are placed into an account in their name before final onward transmission. To re-emphasise, the market is not currently regulated however we mirror the regulated environment in terms of our identification and processing of all transactions on behalf of clients.
- Rod: How long does a sale take?
Richard: Client on boarding takes from a couple of hours for an individual account to a couple of days for a corporate account. Once the client’s account is set up the sale of the crypto will take from a few minutes to a few days. We had an example of a probate case that took three days as the clients held twenty-seven different crypto currencies including some that were esoteric and therefore did not have a large amount of liquidity. In order to get the best price for the client and not push the price down we had to work the order over three days.
- Rod: Is sale/transfer expensive?
Richard: We charge 2-3% of the sale price depending on the crypto currencies involved. This includes the client set up, full KYC and AML checks on both the cryptocurrency and the fiat, the foreign exchange conversion, trade confirmations and a portfolio balance. We feel this is extremely competitive given we are a regulated firm. The custody of assets can be stored either insured or uninsured and is priced accordingly.
- Rod: Lastly, you will no doubt be receiving increasing numbers of enquiries from executors. What is the one thing that we can do to make the process more efficient?
Richard: We are only just scratching the surface of Blockchain and Cryptocurrencies and so I think there are actually two very important points to raise here; the first is overall awareness. Digital assets are not particularly on the radar of many and this means that in the instance of making a Will, for example, clients are not specifically being asked about any digital assets that they may have which then can effectively result in them being lost forever.
If the correct procedures are adopted at the outset then it makes it far easier to manage in the long term. The way we view it is that the question isn’t being asked because of a lack of knowledge which brings me onto the second point; engagement. Law firms and other private client professionals, including legacy managers, should engage with crypto businesses in order to establish the exact process and timelines for carrying out this type of work as well as gaining knowledge on what to look out for and the foundation information on Blockchain and Cryptocurrency.
Companies such as ours are happy to provide this service as we understand there is much work to be done to educate many sectors and by imparting this knowledge there can be a significant mutual benefit.