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Spain Update: Succession issues for cryptocurrency owners
12/07/2021The problem I want to address in this article is the succession issues that arise when cryptocurrency holders die.
Not infrequently we fall into the error of believing that a correct understanding of a subject requires knowing in detail all its elements. That statement may be appropriate for simple issues and could be true for very complex issues, if our capacity for understanding were unlimited, but, as we see on a daily basis, that is not the case.
For more complex questions that require a certain degree of abstraction, a good analogy is much more useful, which, being an imprecise approach to the phenomenon we want to describe, provides the reader with an idea much closer to the essence of what we want to explain. In addition, it allows us to understand much better structures that, if they are precisely broken down into their most elementary parts, will turn any explanation into a thick haze within a forest where we will irremissibly lose our interlocutor.
Succession issues in cryptocurrencies
The boom that cryptocurrencies have experienced in the last ten years (bitcoin was the first, but today there are literally hundreds of them) have made them worthy of countless headlines, both in the specialized press and in the generalist.
The astronomical capital gains achieved by this type of asset in some periods of its short history, followed by crashes that would cut the breath of the most devious investor, have put them on the lips of many people. Nowadays, many people decide on a daily basis to invest a part of their savings in them.
The extraordinary thing about investing in cryptoassets is that most of the people who invest in them don’t even have a rough idea of what they’re investing in. Leaving aside how fascinating it is at the sociological level to see how, increasingly, society adopts and relies on schemes, technologies and products about which it has almost zero knowledge, this produces important dysfunctions and new problems for which we must seek solutions as we go along.
What about the succession of cryptocurrencies?
The problem I want to address in this article is the one that occurs when the holder of a cryptocurrency dies. What about the succession of cryptocurrencies?. To explain it I’m going to focus on bitcoin, as it is the most widespread cryptocurrency, but it would work the same for most of them.
Let’s imagine for a moment that bitcoins were special gold coins. The speciality of these coins is that they must be stored in safes which are numbered and which we will also call ‘purses’. Anyone who wants to buy bitcoins receives the key to the safe (wallet) that contains them.
Now imagine that all these safes were in the same room and, not only that, that the doors of those flow boxes were made of transparent glass: Anyone who is in that safe room can see the contents of any box just looking through the glass. Finally, let’s complete the scene with a small but crucial detail: the access door to that room where all the bitcoin wallets are is any computer screen connected to the internet and capable of browsing the web.
Public bitcoin balances
Anyone with a computer, an internet connection and a web browser can know the balance of any bitcoin wallet just by knowing the wallet number. A fact that is public. With a little expertise, anyone can access the transaction history of that safe since its creation. We’re not talking about great computer skills. These are basic procedures.
In this way, a simple search in your favorite search engine is enough to be able to access, for example, the identification numbers of wallets of the hundred safes of bitcoins that contain the largest number of cryptocurrencies.
Not bad. We already know enough to put ourselves in “bank robber” mode. We are inside a vault in front of the hundred most bitcoin-laden safes in the world. As we have said, we know this because they have the glass door and we see what is inside. Each box contains cryptocurrency worth hundreds (thousands in some cases) of millions of euros at the current exchange rate and many of them have not been opened since they were created. Most likely, its original owners have lost the keys or died… and now… what?.
A combination of 64 characters
Any of the safes containing bitcoins is opened with a code. The key for those boxes is always a 64-hexadecimal digit code, which means that each number in that combination can have 16 possible positions and not just 10. The complexity of that key means that we can spend our whole lives trying combinations because the probability that we will get the right one is negligible.
The greatness and also the misery of bitcoin is that the disposition capacity of any wallet depends solely on knowing the combination of 64 characters that unlocks its access. There is no other way to open the box and dispose of its contents.
At the beginning of its creation, in 2009, and for several years, the only way to be a holder of bitcoin was to be sent the combination of the safe that you were given with the bitcoins. If you lost that combination, because the computer where you had it stored broke down, because you lost the paper where you pointed it or, simply, because you forgot that you had it, you ran out of bitcoins forever. This happened very often, because at that time the value of bitcoin was almost residual. Almost like Monopoly money.
Exchanges, the owners of cryptocurrencies
Years later, when bitcoin began to have material value, because a critical mass of people began to be willing to pay money for it, exchanges emerged. Its mission was to make “cryptocurrency exchange houses”: exchange cryptocurrencies for money and vice versa.
Nowadays it is the most common way to acquire cryptocurrencies. One registers as a user of one of the many existing exchanges, transfers money to that exchange and buys the cryptocurrency you want. This is usually done via bank transfer or credit card.
The balance of our cryptocurrency will appear in the account of the exchange whenever we want to consult it, but if we leave it there, something usual in retail users, who really “has” our cryptocurrency is the exchange and not us.
That’s because we don’t have the combination of our safe. Who has it is the exchange that “keeps” the crypto-asset, until we want to transfer it to another wallet or we want to exchange it for a legal tender that will transfer us to our order.
Bitcoin’s own wallets
If thieves manage to access the keys of the wallets where the exchanges guard the bitcoins of their customers, they will empty those boxes and transfer their contents to wallets controlled by them. As a result, the clients of such exchanges will lose their investment. This is not a hypothesis. It’s something that’s happened several times, with devastating results for exchange customers. Another important issue is that once a transfer of bitcoins from one wallet to another has been made, the operation can no longer be undone, leaving the transfer irretrievably completed.
That is why the most important holders of bitcoins do not usually leave their wallets under the control of exchanges and transfer their assets to their private wallets. That is, they transfer bitcoins to wallets in which only they know the access key.
What happens if a bitcoin holder dies?. We will understand that, for our purposes, a bitcoin holder is the legitimate owner of some bitcoins that, in addition, keeps at your disposal the key that allows you to access the wallet that contains your bitcoins.
Fiscal problems
Your heirs will only be able to access that asset if they know the access key to that wallet. Otherwise there could be the paradox that they would be legal owners of a good that they would never be able to access. It is not difficult to imagine the fiscal problems that this can entail.
The other situation that can cause problems is the following: The deceased holder keeps his cryptocurrencies on an exchange of his choice. How can their heirs recover that good?. It has already been explained that, in this situation, the one who maintains true control over these cryptocurrencies is the exchange. In this case, it is the one that exclusively maintains the access key to the wallets that contain the bitcoins.
Our inheritance rights will have to be asserted before the exchange. There is no other. The problem arises, in practice, because these companies are, in many cases, domiciled in “exotic” jurisdictions. Let’s take the example of the world’s largest exchange by turnover. His name is Binance.
Exchanges in “exotic” jurisdictions
Binance is a company that was initially created in China in 2017. In September of that same year he moved to Japan to escape the restrictions of his home country, but in March 2018 he moved back to Taiwan for the same reason. In 2019 the company indicated that it would move to Malta, but finally it seems that it did so to the island of Jersey and then to the Cayman Islands. Currently it is not easy to know where she is domiciled. It seems like a joke. It’s not. We are talking about an exchange that trades cryptocurrencies worth 75,000 million dollars every day. Trying to assert inheritance rights before an organization like Binance seems to me to be quite difficult. Trying to sue them in the event of a disagreement becomes literally impracticable to me.
The bottom line: If you are thinking about investing in cryptocurrencies it will not hurt to anticipate and think very well before how you want to organize your future transmission mortis causa. Otherwise, what is already starting to happen will happen: that you will take your cryptocurrencies to the grave.
By José María Lamarca and published by Observatorio Blockchain, Marimón Abogados, Spain, a Transatlantic Law International Affiliated Firm.
For further information or for any assistance please contact spain@transatlanticlaw.com