CRYPTOCURRENCY IN ESTATE MATTERS
CRYPTOCURRENCY & ESTATES ISSUES
This is Part 1 of a 3 Part Series on Digital Assets.
Crypto-asset disputes are an increasingly significant area of both Canadian and international law. Cryptocurrencies can complicate estate matters, from valuation and access to legal jurisdiction and tax implications. Proper planning, including secure storage of private keys and clear instructions, is essential to ensure smooth distribution of digital assets and avoid potential complications for executors and beneficiaries.
Litigation in estate matters involving Bitcoin can be complex, as digital assets like Bitcoin require careful consideration of valuation, ownership, and access. Disputes may arise over missing private keys, unclear instructions in wills, or conflicting claims to cryptocurrency holdings. Executors and beneficiaries must navigate the evolving legal landscape of digital assets to ensure fair distribution, while addressing potential tax and jurisdictional issues.
Due to the cross-border nature of many quasi-criminal or criminal activities associated with crypto frauds, jurisdictional challenges often complicate the use of traditional civil recovery methods in assisting alleged victims of crypto-related schemes.
Recent rulings by English courts have found that the transfer of digital assets to wallets held in foreign jurisdictions presents control issues concerning service.
Similarly, U.S. courts have a long-standing tendency to refrain from exercising jurisdiction to assist plaintiffs, citing concerns over the “location” of crypto-assets. These decisions are disappointing and create additional hurdles for those seeking recovery.
Bitcoin and other cryptocurrencies have gained significant attention since the COVID-19 pandemic, emerging as assets held by institutional investors, corporations, wealthy individuals, and retail investors.
While many articles have explored the tax, securities, and estate planning implications of purchasing Bitcoin and other cryptocurrencies, this article specifically examines the issues faced by civil litigants and fiduciaries regarding these digital assets. As Bitcoin and cryptocurrencies continue to be integrated into the portfolios of individuals, corporations, trusts, and estates, it is essential for fiduciaries and civil litigants to understand how courts will address disputes over the ownership and management of these assets. Despite the increasing popularity of Bitcoin among investors and in the media, there remains a lack of case law on the subject in civil litigation, particularly in the context of estates and trusts.
WHAT IS BITCOIN?
Bitcoin, a digital currency created in January 2009, operates without the need for traditional fiat currency systems. Instead, it uses a decentralized ledger known as the blockchain for its creation, distribution, trading, and storage. Unlike physical currency, bitcoins exist only as balances recorded on a public ledger, which is accessible to everyone. Bitcoin is not issued or controlled by any government, central bank, or corporation. Its value has been volatile, with significant price fluctuations that can occur within hours or even minutes.
Bitcoins are associated with unique Bitcoin addresses in the blockchain. To generate a Bitcoin address, a random, valid private key is created, along with the corresponding Bitcoin address. This process is completed almost instantaneously. While uncovering a user’s private key is currently infeasible with existing computing technology, sharing or publicly revealing a Bitcoin address does not compromise the private key. To spend bitcoins, the owner must use the private key to digitally sign transactions. The signature is verified by the network using the public key, while the private key remains hidden. If the private key is lost, there is no way to prove ownership, and the bitcoins become permanently inaccessible.
Bitcoin transactions cannot be reversed due to errors or fraud, and there is no trusted third party, like a bank, to mediate such disputes. The bitcoins are fully controlled by the individual or entity possessing the private key tied to the recipient’s address, and only that person can return the funds.
All Bitcoin transactions are recorded on the public blockchain, meaning that every transaction associated with a Bitcoin address can be traced. While Bitcoin may seem anonymous at first glance, it is more accurately described as pseudonymous. Once a Bitcoin address is linked to an identity, privacy is effectively lost. The distributed ledger also allows users to trace bitcoins back to their original creation by following the path of addresses through which the bitcoins have passed.
WHAT ARE CRYPTOCURRENCIES?
Cryptocurrencies like Bitcoin can be used for purchasing goods and services or as an investment, with users directly engaging in transactions without the need for a bank. While Bitcoin is legally accepted in many countries, certain countries impose restrictions or outright bans. Some nations, such as China, Saudi Arabia, and Egypt, place limitations on Bitcoin usage, while others, like Mexico, have made it illegal, and some, including Bangladesh, Vietnam, and Morocco, impose jail sentences on users.
Cryptocurrency exchanges facilitate the buying and selling of digital currencies for traditional currencies. These exchanges often act as third-party escrow services, charging fees for transactions. Many users store their cryptocurrencies on exchanges, which function similarly to digital wallets. To reduce the risk of cyber theft, exchanges typically store a portion of their assets offline, keeping private keys separate from the internet.
ESTATES LITIGATION AND CRYPTO ASSETS
In civil litigation, Bitcoin poses unique challenges. For example, tracing Bitcoin transactions can reveal hidden assets and parties involved, even if they try to move assets quickly. Forensic experts track Bitcoin addresses and spending patterns on the blockchain, which serves as a public ledger. This process is critical when there’s a risk of asset concealment before filing a complaint or issuing a judgment.
However, Bitcoin’s pseudonymity—where users are identified by addresses rather than personal details—makes it difficult to pinpoint the parties behind transactions. While blockchain data analysis can uncover valuable evidence, this requires time and expertise. Moreover, enforcing judgments against Bitcoin assets can be complicated due to privacy concerns and the cross-jurisdictional nature of cryptocurrency transactions.
Courts are still figuring out how to treat Bitcoin in civil matters, often drawing on traditional property analogies. As cryptocurrencies gain more prominence, clearer legal frameworks will likely emerge to address Bitcoin in litigation, especially in estate matters.
Cryptocurrencies can have a significant impact on estate matters, introducing both new challenges and complexities for executors, beneficiaries, and estate planners. As digital assets, cryptocurrencies are not tied to any physical form and can be stored on decentralized platforms, making them fundamentally different from traditional assets like bank accounts, real estate, or personal property.
Here are some ways cryptocurrencies can affect estate issues:
- Asset Valuation and Volatility
Cryptocurrencies are known for their price volatility. The value of a crypto asset can fluctuate dramatically in a short period, which makes accurate valuation a challenge for estate planning and administration. Executors may face difficulty determining the value of the assets at the time of the decedent’s death, especially if there are substantial fluctuations between the date of death and the actual valuation or liquidation of the asset.
- Ownership and Access Issues
Cryptocurrencies are stored in digital wallets, which are protected by private keys or passwords. Without proper documentation or knowledge of where and how the decedent stored these keys, executors may struggle to access the assets. If a private key is lost or inaccessible, the cryptocurrency may be lost forever, and beneficiaries may be unable to claim these assets. This highlights the importance of providing clear instructions regarding the storage of cryptocurrency keys.
- Estate Planning Considerations
Traditional estate planning often includes instructions for physical assets and financial accounts, but cryptocurrencies are frequently overlooked. Estate planners need to consider how to address the ownership, access, and distribution of digital assets in wills and trusts. Digital asset provisions should be included to clarify how these assets should be managed and distributed. Failure to properly address these matters may lead to confusion, disputes, or the unintentional loss of digital assets.
- Legal Jurisdiction and Cross-Border Issues
Cryptocurrency operates on a global, decentralized network, which means that it is not bound by the laws of any one country. This creates challenges in terms of jurisdiction, especially when an individual’s estate involves assets located across multiple countries. Executors may have to navigate different legal systems to access and distribute digital assets. Additionally, some jurisdictions may have different tax treatment or regulations regarding cryptocurrencies, further complicating the administration of an estate.
- Tax Implications
The tax treatment of cryptocurrencies can vary depending on jurisdiction, but many countries now recognize them as taxable assets. Executors must be aware of the potential capital gains tax, inheritance tax, or other tax obligations related to crypto holdings in an estate. Given the complex nature of cryptocurrency taxation, it is crucial for those handling estates with crypto assets to consult tax experts who understand the evolving rules surrounding digital currencies.
- Digital Inheritance Planning
In response to the unique challenges presented by cryptocurrencies, some companies and services now offer digital inheritance planning tools. These services allow individuals to securely store their private keys and create instructions for their digital assets in case of death. Ensuring that the right people have access to these instructions can provide peace of mind and avoid confusion in the event of an individual’s passing.
Conclusion
As the popularity of cryptocurrencies continues to rise, it’s essential for individuals to address these assets in their estate planning. Estate planners and executors must take proactive steps to ensure that crypto assets are properly accounted for and accessible. This includes safeguarding private keys, understanding the tax implications, and creating clear instructions for the distribution of digital assets. Without proper preparation, the value of cryptocurrency holdings could be lost or inaccessible, which may lead to disputes or financial difficulties for the estate and its beneficiaries.
Please contact our Toronto bitcoin and crypto currency estates lawyers at 416-847-1859 to discuss your legal matter.
Toronto Crypto and Bitcoin Lawyer in Estate and Probate Law
