How to keep your cryptocurrency safe
Posted on 11th August 2023
There are almost 9,000 active cryptocurrencies. You’ve probably heard of ones like Bitcoin and Ethereum. They are popular because governments and banks don’t control them.
However, holding and managing cryptocurrency investments isn’t straightforward.
Legally, the idea of owning something which doesn’t physically exist isn’t yet addressed. Some argue that digital assets are purely information while others regard them as property.
In the UK, HM Revenues & Customs (HMRC) treats cryptocurrency as ‘property’ for inheritance tax purposes. So, if you have invested in cryptocurrency it’s important to include it in your Will.
Where are your crypto assets?
Digital currency such as Bitcoin allows immediate borderless transactions using blockchain technology. These secure digital records called ‘blocks’ are linked and shared in distributed electronic ledgers. In contrast, banks use centralised ledgers to record and regulate financial transactions.
To keep your assets safe, cryptocurrencies rely on secure virtual ‘wallets’. These hold the private ‘keys’ used to send and receive your cryptocurrency. However, your assets are stored and maintained in a ledger, not your wallet.
Without the keys your cryptocurrency can’t be accessed. If you die and your executors don’t have your private keys your loved ones can’t benefit from your crypto assets.
Understanding wallets for your crypto assets
There are different types of wallets for your crypto assets. ‘Hot’ storage means your private key is stored online. Access is faster but the risk of hacking and theft by cybercriminals increases. A ‘cold’ wallet stores your private key offline on a storage device like a USB. You could even simply write the details down on a piece of paper and keep it somewhere safe.
Some banks allow customers to invest in cryptocurrencies and store wallets on their behalf. While their security is strong, the risk of hacking remains. However, you might receive compensation if this happens.
You can also use ‘hosted’ wallets to hold your private keys. These are managed by a third-party. Crypto exchanges help investors buy and sell cryptocurrency and some offer wallet services through a cloud account.
In reality, there’s always a risk that someone will access your keys without your permission. However, if you don’t make provision for someone to access your wallet if you die your investment could disappear. When the founder of the crypto exchange, QuadrigaCX, died unexpectedly he hadn’t made any provision for access to his keys. Investors lost an estimated US$190million.
What happens to your crypto assets if you die or lose capacity
You should make arrangements in case you die or lose mental capacity. Your executors or attorneys, if you have Lasting Powers of Attorney, need to know how to access your crypto assets. However, if a third party manages your wallet, such as a crypto exchange, there could be some problems.
Without instructions on how to access your virtual wallet, there is very little your executors can do to retrieve your crypto assets.
Please get in touch for advice on including your cryptocurrency and other digital assets in your Will.
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