Kieran Forsyth, Associate in the Contested Wills, Trusts and Estates team at Hugh James, looks at the dangers and pitfalls concerning the management, administration and awareness of digital assets, particularly in the context of estates.
What are digital assets? Broadly, they are the possessions accessed on digital devices such as a laptop, mobile phone, tablet or otherwise. They are normally accessed via an online account run by a third-party provider, such as Google, Facebook or Apple. They can be photographs, videos, blogs, online gaming avatars, cryptocurrencies and other virtual digital assets with particular value such as Non-Fungible Tokens (“NFTs”).
It seems more relevant to concentrate on those digital assets which carry particular value such as cryptocurrency and NFT’s given the pitfalls associated with their mismanagement.
Cryptocurrencies are notoriously private in the way that they operate and in the way that they are set up. If you own cryptocurrency you don’t own anything tangible, but what you do own is a “key” which allows you to move a record or a unit of value from one person or company to another with or without a trusted third party. To access the inherent value in that asset you have to match the private key which you may hold yourself, or hold with a custodian account, to that of a public key on something called the “Blockchain”. If you lose the private key, you can’t access the public key and therefore you lose the value.
As such, safe storage of your private key is not only hugely important in life but also on death. Problems are now arising as people are keeping their private keys, well, private, leaving personal representatives either none the wiser or unable to unlock these assets and little means to be able to resolve the issue.
Perhaps putting this into numbers is a more useful way of showcasing the value and potential exposure surrounding this type of digital asset. At the start of May 2011, you could buy one Bitcoin for $3.50. If you decided to invest $1,000 at that time you would have received roughly 268 Bitcoins. Recent figures show that if you kept those Bitcoins they would have an approximate value at current rates of around $10,425,000.00.
You can see that there is a particular emphasis on the duty of care owed by personal representatives, trustees, attorneys and deputies when managing the affairs of those who may have held cryptocurrency in their lifetime. As we know, personal representatives have a duty to collect and preserve the deceased’s assets but how far do fiduciaries have to go to locate digital assets?
Given that these assets have been around for some time now and are attracting significant press attention, arguably personal representatives should at the very least be making enquiries as to whether such assets were held. Failure to do so could potentially lead to significant assets not being realised.
How might these assets have been kept by a deceased? There are generally three main possibilities: the first is that the individual may have kept their private key themselves; the second is that they held them in crypto asset exchanges, such as Coinbase; and, finally, they may have used a third-party online custodian.
What can you do to establish whether the deceased held these digital assets? Perhaps the biggest clue lies in the will. Does the will cater for digital assets? Some testators are going as far as appointing separate executors to deal with their digital assets given the complexity of dealing with them.
Further, you could make enquiries with some of the exchanges, such as Coinbase. You may also find that the deceased held an inventory of their digital assets and passwords which they sought to store alongside their will. Look out for certain digital devices which look like memory sticks, as these are often used by the more advanced cryptocurrency holders to store their private keys given their more advanced security features.
Digital assets are becoming increasingly popular and, while many are predicting that the bubble will soon burst, look set to stay for a while at least. Knowing not only how to deal with such assets but also how to begin locating them is going to become more and more important for fiduciaries both during life and post-death.