Death and crypto assets
What happens to a $500 million fortune once the owner of this fortune passes away. Surely his heirs will get access to this fortune according to his will. But that might not happen if this fortune is based on crypto money - Bitcoin and tokens. This is the world of “not your keys, not your crypto”.
This is what happened with 54 year old Matthew Mellon II. Matthew passed away in April 2018. But at the time of his unexpected passing he reportedly owned crypto coins worth hundreds of millions of dollars. Estimates of this fortune vary between $250 million to $500 million. To spend the crypto money you typically have to be in control of the keys associated with the crypto. Leaving a will to disburse the fortune will be of no use if the receivers of the fortune do not have access to the keys.
Matthew’s wife and three kids do not know where the keys associated with these crypto coins are securely stored. And until these keys are found, the fortune cannot be accessed by anyone. Not by them, not by the government, not by anyone at all.
And this is not a stray incident. Consider QuadrigaCX - it was considered to be Canada’s largest cryptocurrency exchange. But it had to shut down after the death of the company’s CEO and founder - 30 year old Gerald Cotten. The $190 million worth of coins were controlled by keys known only to Mr. Cotten. And these keys were lost after his death. The crypto assets controlled by these keys are considered to be lost forever.
So does this mean that all crypto assets are lost when the person passes away. Not really.
But given that sometimes crypto assets might be lost when the person passes away, does it mean that we should not have any crypto assets. Not really.
All this sounds confusing right? In this article my objective is to address this confusion. I will also argue that crypto assets are the best assets to ensure that the right heirs will get access at the right time. And all without having to depend on a third party. To ensure this the inheritance plan will have to leverage crypto technology.
But first let’s consider the types of assets and what happens to each type of asset after the death of the person.
Assets after death
I divide the assets into two types. Crypto assets and non-crypto assets. So what happens to these assets when the owner of these assets dies. Let’s look at this next.
Crypto assets
All crypto assets are recorded on the blockchain. And every crypto asset is associated with keys that are stored in wallets. The key associated with a crypto asset is required in order to transfer ownership of the crypto asset. Loss of the key means that the ownership of the crypto asset cannot be changed.
Wallets can be pure software applications or can be made of a combination of software and a hardware devices. An entity that controls the wallet also controls the keys stored in the wallet and the crypto assets associated with these keys. Typically we talk about control of keys and not the control of wallets.
Based on who controls the keys, we have two types of crypto assets. These are
Owner-controlled keys: In this case, the keys associated with the crypto assets are controlled by the owner of the crypto assets. This can happen when the owner has purchased crypto using wallets such as EdgeWallet, Strike, Metamask etc. This is also referred to as a non-custodial solution.
Third-party controlled keys: In this case the keys associated with crypto assets are not controlled by the owner of the crypto assets. This can happen when the owner has bought crypto through third parties such as Robinhood or Coinbase. In this case, the wallets containing the keys are controlled by these third parties and not by the owners of the crypto assets. This is also referred to as a custodial solution.
Just having a will specifying the heirs will not work when it comes to the non-custodial solution. The traditional process of inheritance is incapable of ensuring the transfer of crypto assets. Rather the owner of the assets needs to have a solution in place to transfer the crypto assets from the owner’s wallet to the heir’s wallets at the right time. Note that the owner cannot share the keys stored in his wallet before his death. By doing so, the owner risks loss of ownership of the assets if the heirs decide to transfer assets using the shared keys before the death of the original owner.
The custodial solution will work with the traditional process of inheritance. With the right legal documents, the third parties controlling the keys (such as Robinhood) and the associated crypto assets will transfer the assets to the right heirs at the right time. Of course the risk is that the third parties might collude to prevent the right heirs from getting the right assets.
This risk is low in developed countries with strong legal systems. But this is typically not the case in several developing countries. In that situation, we might have the case of “might is right”. So the powerful can seize the assets of the weak. While one can argue that this can happen anytime, this injustice can become worse at the time of the death of the owner.
In such a situation, it might be better for the owners of the crypto assets to convert their crypto assets into the non-custodial type. In addition, they have to ensure that the right crypto based inheritance solution is in place to transfer the right assets to the right heirs at the right time.
Non-Crypto assets
All non-crypto assets fit into the traditional model of inheritance. The owner of assets creates a will following the legal process. And the state/government ensures that the will is executed once the person passes away. This is typically the case in developed countries. But just like in the case of the custodial crypto assets, here also in many developing countries where rule of law is not well established, people might be faced with the situation of “might is right”. So the powerful can seize the assets of the weak just as in the case of custodial crypto assets.
In such a situation too, as remarked earlier, it might be better for the owners of these non-crypto assets to convert these assets into non-custodial crypto assets.
Crypto approach towards the transfer of ownership of crypto assets
As we have seen earlier, the traditional approach towards wills depends on the rule of law. And this approach depends on the government to ensure that the will is executed as per the wishes of the deceased. Thus, this approach has risks associated with ensuring that the right heirs get the right amount of assets at the right time.
The crypto platforms though provide another way to ensure that the right heirs get the right assets at the right time. This approach depends on using the concept of smart contracts that are supported by nearly all the crypto platforms these days. And this approach should not depend on trusting a third party to do the right thing.
We call such an approach crypto wills. Unfortunately at this time, we do not see any solution focused on crypto wills. Some solutions exist that are more focused on ensuring that the owners of crypto assets do not lose their keys. And many people expect these solutions to be used for ensuring inheritance of crypto assets too. However, this is like putting a square peg in a round hole.
I expect to see some solutions focused solely on crypto wills in the near future. In the meantime, ensure that the crypto assets that you own are of the non-custodial type. So that you control the keys associated with these crypto assets.