Tag: Virtual Assets
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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Massive multiplayer online role-playing games (“MMORPGs”) are estimated to generate $11 billion in annual revenues by the end of this year, representing roughly 21% of the worldwide digital games market. By 2017, this number is forecast to grow to $13 billion and their popularity only seems to continue to grow. For instance, World of Warcraft, a popular MMORPG, had over 10 million subscribers as of November 2014.
By way of background, many of these games implement a virtual economy. A player can earn or buy virtual items, property, or currency to be used in the game which can grow to have a significant economic value. As this Forbes article explains, in another popular MMORPG game, Entropia Universe, Jon Jacobs successfully sold a virtual space station he had created for $635,000. In order to make the initial purchase of the virtual asteroid which cost him $100,000, Jacobs took out a mortgage on his home. The investment clearly paid off, with his virtual property making him over half a million dollars in profit in just five short years.
Although most virtual world portfolios are not as impressive as Jacobs’, many gamers have accumulated significant assets by way of smaller purchases (including virtual real estate) that all together can make up a valuable virtual asset with real world economic value. The challenge that this creates is that these virtual economies exist solely at the discretion of the companies that run them. As this article points out, holding assets in virtual property, such as World of Warcraft gold or virtual real estate, is incredibly risky. There is simply no guarantee that the game will not be shut down or that the company will not debase the currency with an update or expansion.
These unusual assets raise unique issues for the estate practitioner. Primarily, how far do we need to go to ensure that all assets have been properly identified and valued in applying for probate? It is not difficult to imagine the repercussions of neglecting to include real property in a probate application. However, it is less clear when dealing with virtual real estate, despite the fact that it could potentially have significant value. In some cases, the deceased’s family may be unaware of the virtual holdings or of the fact that they have a real world value outside of the game. In other cases, there may be challenges with obtaining passwords to access the virtual assets.
We also need to be alert to potential liability issues. In including an asset such as a virtual financial portfolio that may contain virtual real estate, proper valuations may need to be obtained. This is not unlike many other unique real world assets, especially when the value is potentially significant or unclear. This may involve advising a client to seek the assistance of a professional valuation. Misstating the value of an asset, virtual or otherwise, can have significant tax implications.
As the notion of digital assets continues to expand, it is important to be aware of the different types of assets that a testator may hold upon death. Virtual real estate and other virtual financial holdings can have real world value and as such, should not be discounted as irrelevant.
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