Bitcoin: Is it a hidden asset?
For an executor or attorney, looking after another’s personal and financial affairs can seem like a daunting task, especially if you have never done so before.
Both roles require careful management of another’s funds for the benefit of the individual, their estate and (where appropriate) their beneficiaries. It is your duty to keep an accurate record of all the wealth owned by that individual. But what if you are unaware of a holding?
We are truly moving into the ‘digital age’ as more people are becoming computer literate and many have assets and businesses which can only be registered and accessed on the internet. Examples can include funds with PayPal, eBay and other selling sites (whether ad hoc or as a legitimate and taxable business), digital documents such as photographs and even winnings from the National Lottery. One such asset which was released on 9th January 2009 but has only recently come into main steam media prominence is Bitcoin.
So what is Bitcoin?
Bitcoin is a decentralised digital currency. It exists only online and is the world’s first successful implementation of a distributed cyptocurrency. One of the early concerns of Bitcoin was it’s perceived worthlessness as it is not backed by anything. This brings us to the Subjective Theory of Value whereby individuals can freely determine the value of a thing; not on its own merit, but on its importance in achieving desired ends.
The same principal can be applied to the physical currency we use today. It has no inherent value in itself, only the value that we as individuals and as a collective have agreed to place on it as a method to achieve our desired ends of purchasing an item or service. The Lewes Pound in East Sussex and the Totnes Pound in Devon are both examples of a new currency (and in the case of Lewes a revitalised currency) being adopted under this Theory. The aim of these currencies is to encourage residents to shop locally and as such it is endorsed by local businesses who will accept it as legal tender.
Bitcoin and a wide variety of other cryptocurrencies have been accepted by a large community as a legal tender in much the same way.
How is Bitcoin created if it is not minted like a physical currency?
A few definitions will help us here:
Block chain – shared public ledgers form the foundation on which the entire Bitcoin network relies. Much like a bank will retain records of transactions to back up the balance you see when you look at your statement; the block chain records the verified transactions.
Cryptography – the study and practice of techniques for secure communication in the presence of a third party. This enforces the integrity and chronological order of the block chain, lending it legitimacy.
Mining – the confirmation or verification of blocks within the block chain is known as ‘mining’. This is the processing stage where transactions are checked by a number of different computers within a network to ensure that Bitcoins cannot be cloned or fraudulently added by any person. The network is considered neutral as no single computer, server or individual has overall control.
Bitcoin Wallet – in order to use Bitcoin, you need access to the Bitcoin network. Much like email, a Bitcoin address is created by the Wallet. You can disclose the address to people you wish to receive funds from. Unlike email, this address is only be used once and a new Bitcoin address is produced for each transaction to be added to the block chain. This forms part of the mining process using cryptography.
Private Keys – if the Bitcoin Wallet can be equated to an email address, then the Key is the password allowing access to the funds held within. The Key or seed is a digital signature of the Bitcoin Wallet’s owner supported by mathematical proof. This is checked during the mining process.
How can I use it?
Similar to the funds held in your bank account, you can make instant payments to anyone, anywhere in the world. You can use an app on your phone or computer to complete the transactions. Like any other currency, you can also exchange Bitcoins into GBP. By September 2017, 1,574 Bitcoin ATMs had been installed worldwide and they continue to be installed at a rate of 3 a day. As you might withdraw funds from your bank account abroad, the exchange rate transaction fee of around 9% is deducted and you withdraw the local currency.
Bitcoins have all the desirable properties of a money-like asset. They are moveable, durable, divisible, recognisable, scarce and difficult to counterfeit. As long as you keep your details secure, they are considered impossible to steal.
I don’t own any Bitcoin, why is this important to me?
If you are an attorney or executor, you need to be aware of unusual and non-tangible assets that you need information about and access to. If you are dealing with an individual’s affairs, you may find you need to look through their paperwork. You might come across a piece of paper with handwritten or printed random numbers. Would you file it away or toss it in the bin? One bereaved Canadian family did indeed throw away such a scrap of paper which turned out to be the Private Key and as such were unable to draw down their deceased’s Bitcoins from the Bitcoin Wallet. Not only is Bitcoin set up to be secure, it also means that it can be difficult to identify the ownership if there is no paper trail. Luckily the family were able to identify the existence of the Bitcoins from bank account statements and as such were able to go through a commercial service to get access to the estate funds.
Make sure all of your affairs are in order
The final thought to take away from this is to be savvy with your information. Your future attorneys under a power of attorney or executors under your will need access to your assets including those currently held in the virtual digital world. Keep a record of such assets including any usernames and passwords required to access them. You may wish to keep these in hard copy, perhaps secure with your will or powers of attorney, to be updated as and when needed. Alternatively, you could keep these details on your computer, kept offline and secured by one master password; that you provide to the relevant people. If you do hold Bitcoins or other cryptocurrencies, ensure your Private Key is labelled as such so it is not inadvertently thrown away.