Cryptocurrencies, such as Bitcoin and Ethereum, have been surging in popularity. As our colleagues have written here and here, they have raised a variety of unique considerations in the context of estate planning. However, the underlying technology in cryptocurrencies, blockchain, has given rise to a variety of digital tools beyond cryptocurrency. “Smart contracts” are one of these.
Broadly speaking, blockchain allows blocks of information about transactions to be recorded and stored on a distributed ledger. This article provides a more detailed overview of blockchain for those interested. Smart contracts are an extension of blockchain. They are programs stored on blockchain that run when certain pre-determined conditions are met, thus automating the execution of an agreement. Since the steps in a smart contract are hard coded, failure to fulfill conditions as agreed upon, prevents any progression. When conditions are fulfilled, the blockchain is updated and the agreement proceeds.
Two of the main attractions of these smart contracts is that they can serve to accelerate the transaction by removing middle-men and add a high degree of certainty to the performance of an agreement based upon the pre-established terms.
These benefits, however, should be approached with caution. The basis for the certainty arising from smart contracts is that they are hard coded, and the blockchains on which they are built rely on encryption to prevent fraud. The same certainty which is a strength can be a weakness though, as it makes changing the terms of an agreement difficult, if not impossible, in some circumstances.
Businesses advertising smart contracts in the context of estate planning are becoming more common. Potentially removing the need for executors, lawyers and other intermediaries in the administration of an estate can sound very appealing from a cost perspective.
Having said that, one should bear in mind that the law and factual matrix of an estate can and often does vary over time. Certainty can become fatal inflexibility in the face of change. A change in the law or conditions around an estate may prevent the performance of a smart contract where the coded preconditions require an impossible or illegal action.
New technologies are often exciting, and no doubt can bring positive change, but they also bring unknown risks. An abundance of caution would be well advised when using novel tools like smart contracts.
Thank you for reading and have a great day!
Suzana Popovic-Montag & Raphael Leitz
Coinbase co-founder and CEO Brian Armstrong recently blogged about the future of cryptocurrency, predicting that it will reach 1 billion users by the year 2030 (up from about 50 million at the start of this decade). With the anticipated increased uptake of cryptocurrency, we can expect that more and more people will hold these types of digital assets on their death. The question then arises: how should cryptocurrencies be dealt with in one’s estate plan?
By way of background, cryptocurrency is virtual currency that uses cryptography to verify financial transactions and control production of currency units in a decentralized, peer-to-peer exchange network. Cryptocurrency runs on Blockchain technology, which allows for blocks of information about transactions to be recorded and stored on a distributed ledger. When a transaction takes place, a block is added to the blockchain and there is a corresponding change in balance in the buyer and seller’s cryptocurrency wallets.
A cryptocurrency wallet or “crypto wallet” contains a person’s public and private keys – the former is used to receive cryptocurrency and the latter is used to spend/send cryptocurrencies to other wallet addresses. The crypto wallet is the only means of accessing one’s digital currency. There are different types of wallets that can be used to store and access digital currency, such as online accounts, mobile apps, external hard drives, or simply paper.
Because cryptocurrency is an intangible asset with little to no paper trail, special estate planning considerations should be made to ensure that the value of these digital assets is not lost on death and can be distributed to the intended beneficiaries.
First, the cryptocurrency owned by a person should be expressly referred to in their will to ensure that their executor is aware that these digital assets exist. A testator should then provide sufficient detail for their executor to be able to locate and access the testator’s crypto wallet. Specifically, the testator should describe what type of crypto wallet they have, where it is stored, and provide any other information that may be needed to access the crypto wallet. Instead of listing this sensitive information in the will itself, which becomes part of the public record through the probate process, a testator should include it in a memorandum to their will.
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As I write this, a single bitcoin is worth more than US$8,200. It will undoubtedly be worth a different amount by the time you read this, because the value of bitcoin can change quickly and dramatically.
No one can say with certainty whether this is a bubble that will burst or whether it’s a ground floor price that will rise even further. But what we can say with certainty is that cryptocurrencies today (whether it’s bitcoin or other digital currencies like ethereum or litecoin) have real value that can be used to buy things or be exchanged into hard currency.
If you are new to cryptocurrencies, and remain baffled by what they are, you are not alone. I love this simplified explanation of bitcoin – it can help wrap your mind around a very elusive concept.
For a step-by-step guide to investing in cryptocurrencies, this short article is a great primer that sets out the process and the risks. And for a more Canadian-specific take on investing in these currencies, this article highlights the process and the risks.
Make a plan – it’s an asset like any other
I’m not advocating an investment in cryptocurrencies – that’s for you and your financial advisor to decide. The issue from an estate planning perspective is that thousands of Canadians now own cryptocurrencies, and their value has increased by many multiples over the past year. There are, quite literally, millions of dollars tied up in cryptocurrencies in Canada. For many, an experimental hobby, dabbling in cryptocurrencies, has become a relatively sudden source of wealth.
My previous blog in 2014 highlighted the need to ensure that your estate specifically deals with digital access and the distribution of digital assets. This appears to be even more important today with the rise in value of cryptocurrencies.
This recent article sets out some estate planning tips that relate specifically to digital currencies. It’s well worth a read, especially if you’ve taken the plunge and own these currencies.
Thank you for reading … Have a great day!