Cryptocurrency and NFTs, the Impact on Digital Asset Succession (Part 1 of 2)

by | Mar 2, 2022 | Uncategorized | 0 comments

The journey of the blockchain network has been a long time coming.  In August 2021, Forbes reported that the crypto industry is worth give and take, $2.5 trillion with a high volatility rate. That is $2.5 trillion worth of money that may be lost if professionals fail to create an effective succession plan for their clients. 

So, what is the nature of this record-breaking intangible asset, and what does it mean for estate and financial advisors? This 2-part series will discuss some of the highlights of blockchain assets (cryptocurrency and NFTs) as it affects involved with estate planning including lawyers, financial advisors, and clients. The aim is to highlight some of the unique and differentiating features between digital, tangible, and physical assets, and the world of crypto for estate purposes. How are they identified? How are they accessed and made transferable for estate administration or trust settlement.? This 2-part blog provides an overview of these innovations and the impact on Trusts and Estates work. To understand these assets, a quick explanation of how crypto and NFTs are created…. using Blockchain. 

What is Blockchain?

The blockchain is a decentralized, unchangeable digital archive used to store the records of transactions involving digital assets carried out within its network.  In other words, Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.  It is a public ledger that enables users to authenticate transactions, see the value of crypto, and track assets such as NFTs and SmartContracts. As a technology, blockchain has been around for several years by financial institutions such as Wells Fargo, HSBC, Credit Suisse, and more in settling payments and syndicated loans. It’s gained widespread use because of its transparency; it contains the record of transactions but with a measure of anonymity to protect personal data. Therefore, as crypto and NFTs change hands, the information is saved in blocks of interconnected data revealing the origin and the current status. A blockchain network may be private, public, permissioned, or consortium. 

What are Cryptocurrencies?

Using blockchain technology, cryptocurrency is a form of money and a store of value, but unlike traditional, government-authorized currencies, it is digital and has no physical form. Examples of Cryptocurrencies include Bitcoin, Litecoin, Ethereum, Dogecoin, etc. Crypto is designed to be used for payment (that is, legally a barter) for goods and services, and its value is determined by the market. 

Factors that influence the value of crypto includes common market trends, government’s approval, perceived value etc. Also tweets from some industry players such as Elon Musk have also caused the value of some coins to fluctuate. Although crypto is not generally used for purchasing physical products, more retailers, service providers and government agencies are accepting some cryptocurrencies as a payment method. Some of the most recognizable include KFC, Burger King, AT&T, The American Red Cross, the state of Ohio (for property tax payment). And many more. El Salvador has gone as fart to recognize it as a legal form of tender.

The Growth of Cryptocurrencies

The growth of the crypto industry has made it impossible for the world to look the other way. It is no longer the exclusive preserve of the rich, a lot of people are investing in bits and fragments and owning a little piece of different kinds of crypto.

As far back as 2009, only members of the Bitcointalk forum had given thoughts to the rise of crypto and invested some energy in improving their digital assets. At the time, bitcoin would make news for being used to purchase a pizza (at the cost of 10, 000 bitcoin); Leaping into the future, the same bitcoin would be valued at a record high of over $66, 000 in 2021.

It is no doubt that cryptocurrency has gained widespread appreciation; such that investors now liquidate tangible assets to possess these intangible assets. While the issue of market regulation may be out of the control of clients/ traders/ investors; it is important that investors protect their property and estate portfolio, and as professional advisors and counsel, it is our job to help them do so.

It is safe to conclude that any blockchain assets with significant market value are part of a person’s estate. Unfortunately, without due diligence and extra layers of security, this kind of asset can easily be lost forever, especially upon the death of its original owner. This is why a fitting strategy must be incorporated into estate plans for value preservation and a smooth transference to heirs, in the same manner and attention as would be paid to physical and tangible property. 

Read Part II of this series to see how cryptocurrencies are valued and the role of financial advisors, lawyers, and estate consultants.