how to properly pass on your digital heritage to your heirs?

Possible reconciliation between self-sovereignty of its crypto-assets and their inheritance?

The adage “not your keys, not your coins” combined with the rule of self-sovereignty or personal sovereigntynamely the fact of having full ownership and responsibility for its funds through the exclusive knowledge of its “private keys”, designate two essential principles in the cryptocurrency ecosystem.

Investors must indeed rely on a decentralized network made up of a blockchain rather than a central body which is known to devalue the assets of others.

In order to guarantee the sovereign possession of its digital heritage, this requires the author to keep this information secreteven those closest to him.

The autonomy allowed by said self-sovereignty can however present an important gap, often unsuspected: the inheritance. In such a context, how can you ensure that your crypto-assets are passed on appropriately and on time to your heirs?

In other words, the main problem is to determine the best way to transmit his private keys “after our death”, without revealing them “before” or how can we be sure that they will not be stolen, lost or inaccessible during our lifetime?

Do we still need to remember that by depositing their cryptocurrencies on a centralized exchange or CEX (such as Binance for example), the majority of investors seem to lose sight of the fact that they no longer have control of their private keys? Faced with such a finding, it will be up to the crypto investor to take, during his lifetime, appropriate measures to transmit his account identifiers to his death.

These seemingly innocuous questions are nevertheless fundamental knowing that to date it is estimated that almost 6 million BTC are lost forever and are now in inaccessible wallets. We therefore do not know how many of these bitcoins belong to HODLers who have died without having thought of sharing access to their wallets with others, whether on the pretext that they will take care of them later or that they will part with their bitcoins before they die, or even that they will live forever.

For example, although it will never be possible for us to know exactly how many BTC the creator of Bitcoin, Satoshi Nakamoto, was able to extract, the most commonly accepted estimate is that he would hold a wealth of approximately 1.1 million BTC, fortune currently unattainable for the same reason: no one else has access.

What about Matthew Mellon, a famous 54-year-old banker, who died suddenly in 2018 leaving behind an unmatured portfolio for his heirs, estimated at $500 million worth of XRP (bearing fruit at the start of a capital of one million dollars which was quickly transformed into a billion dollars)?

In addition, if 4% of the world’s population now owns cryptocurrencies according to a Triple A report, this rate is increased to 6% for the French according to a study by the European Central Bank (ECB) published in May 2022. This last figure would even be 9.4%, according to a study led by KPMG reported by the Association for the Development of Digital Assets (Adan).

Interestingly and strikingly, a study carried out in 2020 by the Crenation Institute reveals to us that nowadays nearly 90% of cryptocurrency holders worry about their assets and what will happen to them when they die. Despite these concerns, cryptocurrency owners are nearly four times less likely to use a will to pass on their digital inheritance than non-cryptoowners.

Traditional and blockchain-based estate planning tools

To remedy this, let us now look at some estate planning toolswhich are not intended to be exhaustive, allowing to alienate its capital in cryptocurrencies to its heirs by using solutions emanating from blockchain technology while highlighting a number of advantages offered by the latter compared to more traditional techniques.

The first option that comes to mind for the inheritance transmission of one’s digital heritage is to contact a trusted third party and entrust him with the keys. This intermediary can be of two types.

The first figure that one naturally thinks of is a close person, but who is not as such the heir. Although calling on this relative may at first glance be reassuring, no guarantee and certainty can be given that the private keys representing the recovery information allowing access to cryptos operating like a password are not stolen or used for malicious purposes. Caution and vigilance therefore remain in order..

Can also be a trusted third party the use of either a traditional bank or a crypto exchange platform.

Thus, the American exchange Coinbase allows a family member to access the account of a deceased relative after providing a number of documents, including a death certificate, a last will, a certificate of inheritance and a document. valid government-issued photo ID of the person(s) mentioned in the award letters.

A second useful estate planning tool that comes to mind is to make a gift, during his lifetime, from his digital heritage to his children. Current French tax legislation allows an individual to donate, every 15 years, 100,000 euros per child (or 31,865 euros per grandchild), without having to pay gift tax (beyond above this threshold, known as an allowance, donations are subject to progressive taxation).

It is also preferable to proceed first to a donation of its cryptos and then, if the recipients so wish, to their subsequent sale (and even though they themselves would have realized a capital gain in the meantime) since the said donation will make it possible to purge the latent capital gain relating to the cryptos given and only a single flat-rate levy (PFU) of 30% will apply, also called “flat tax”.

A third interesting tool for transferring your cryptocurrency portfolio to your heirs is to formulate it in an authentic will. (i.e. a will drawn up by a notary) or mystical (the testator sends his closed, stamped and sealed will to the notary).

The will in question can either be limited to mentioning the existence of a crypto wallet (assuming then that the legatees will know how to access it), either indicate both the presence of this wallet and the steps to access it. In this second hypothesis, it may be interesting and recommended to draw up a precise and detailed inventory of your cryptocurrency assets as well as to explain the way and the manipulations that will be necessary in order to achieve them.

To do this, nothing prevents the author of the will from using the advice and directives of Pamela Morgan from her book “Cryptoasset Inheritance Planning”, which proposes to establish a succession plan for its crypto-assets in a letter slipped into a closed envelope and intended for the heirs and which they will read on the death of the of cujus.

Whether the said transmission takes place by way of a gift or through a will, it should be noted that it will be necessary for the donees-heirs not to lose sight of the following elements. In order to access cryptos given inter vivos or bequeathed by will, they will have the task of opening an account on a cryptocurrency exchange platform or creating a so-called self-hosted digital wallet (non-custodial wallet).

On the day of said transfer, the donor and/or the beneficiaries, with the help of a notary, will then have to determine the value of the portfolio by comparing the price of the crypto-assets on different exchanges, then averaging the different prices. . To this end, note that they can use aggregators such as CoinGecko or CoinMarketCap. It is these platforms that are used by tools like Waltio for the taxation of cryptocurrencies.

Although essential, these steps actually have a number of disadvantages..

The first inconvenience results from the obligation to submit to a trusted third party, the notary, as a central authority of which it is not certain at the present time that he is equipped with the tools and the (best) up-to-date knowledge to help the heirs in the said transmission. Indeed, how and on what basis will he determine the choice of different platforms and the valuation of crypto-assets (apart from stablecoins) which are, by definition, eminently volatile at all times?

The second concern arises from the observation that in order to form a title and, as a publicity measure, to be “opposable” to third parties (in particular towards possible creditors of the donor, including the tax authorities), the donation should ideally be poured into an act, which implies that the holding of crypto-assets will no longer be completely confidential.

Finally the use of the services of such a trusted third party also involves a certain costwhich is not always transparent and can be random, in favor of the chosen notary (expenses and fees for research and the execution of a deed) as well as the debit of the “flat tax” mentioned above and the calculation complications and the delays that may result.

On the same theme: Are notaries threatened by the blockchain?

The use of blockchain as a better alternative?

It is clear that appealing directly to a decentralized solution delivered by the blockchain to make a donation of its capital in cryptos or bequeath them by means of a will to its heirs allows to do without the aforementioned pitfalls and to enjoy in particular the following advantages.

Smart contracts

The execution of smart contracts a decentralized application (or DApp) offers the guarantee of greater speed in the sequence of all the stages of the realization of the succession planning vis-à-vis its aforementioned traditional variant, thereby offering more efficiency and serenity. The following events resulting from human intervention will indeed be non-existent:

• researching and making contact with heirs who reside on the other side of the globe (which can be tedious and time-consuming);
• the notary and/or the heirs may either be late or be absent at a meeting;
• a certificate from a bank or the tax authorities from the country of the beneficiary is missing) or an authorization document (a power of attorney from an heir to receive the funds in question) or it is lacking the required formalism (date, signature, apostille, etc.).

Cost savings

Confirmation of a significantly lower and predictable cost : are only payable and can be viewed prior to the transaction, any service fees and so-called “gas” fees, i.e. a unit of payment allowing the payment of transaction fees.

Greater confidence

An increase in trust due to a relatively greater likelihood of honesty : unlike a centralized human intervention, the determination of the calculation and the fixing of the fair pecuniary valuation of the crypto-assets whose alienation is envisaged is allowed by the execution of DApps jointly with one or more oracle( s).

Better privacy

The certainty of greater control and discretion of our personal data so that they remain more confidential : contrary to a notarial deed which must for its validity and its opposability to third parties to include a set of data prescribed by law including in particular the identity of the parties (their surname, first name, marital status and address), with a DApp, only certain essential information (such as the date of the transaction, its amount and its costs as well as the cryptographic public addresses of the sender and the recipient), will be recorded and searchable in the blockchain and at any timewhich can be a source of relief and tranquility in the face of possible somewhat indiscreet looks (known or unknown to relatives, future heirs or any other person).

resistance to censorship

The guarantee that the funds are uncensorable (no one can prevent their transfer or force the display of their content, except its owner) and cannot be blocked, seized or confiscatedat least not as easily as going through either a fiat currency transmission solution or a transfer solution offered by the blockchain but entirely managed by a centralized authority such as a bank, a crypto exchange, a notary, a lawyer, etc.

A less restrictive operation

The assurance of greater agility, flexibility and adaptability in the execution of the operation : where the donation recorded by notarial deed can be accompanied by a certain number of traditional methods, greater creativity is allowed by resorting to a donation operated in a decentralized manner by the blockchain. To illustrate our point, let’s take the example of the so-called authorization protocol (Consent Protocol) from the Ternoa project.

This smart contract offers recipients of a capsule, i.e. the “encapsulated” digital heritage transmitted in the form of a non-fungible token (NFT), the possibility of requesting access to the heritage contained in the said capsule, and this after a certain period. The opening is then conditioned by the agreement of the issuer (during his lifetime).

With the “Death Protocol” emanating from the Ternoa project, the encapsulated digital heritage is transmitted automatically after the death of its creator. The protocol is based on local death registry APIs. However, it should be noted that this protocol may use a third party, which may somewhat compromise the 3rd advantage mentioned above.

6 decentralized solutions to pass on your digital heritage to your heirs

Here is a non-exhaustive list of solutions working for the non-centralized transfer of digital heritage.

If they should, over time, refine their offer, digital estate transmission services operating in a decentralized manner are still in their infancy and could become essential for investors who do not wish to share, for the aforementioned reasons, their private keys in a will or keep their tokens on centralized platforms.

Conclusion on the transmission of cryptocurrencies to his heirs

As you will have understood, there are many techniques that make it possible to transmit one’s digital heritage to the benefit of one’s heirs. Due to their particularity, each has its own advantages and shortcomings.

It is therefore up to everyone to weigh the pros and cons of each planning tool mentioned above.. Thus, it should be considered the degree of speed desired for the completion of each transaction. The costs involved and the possibility of previewing them before each execution should also be taken into account.

Nor should the level of importance attached to integrity in the calculation and determination of the fair financial valuation of crypto-assets.

A point should also be established regarding the search for more confidentiality of personal data. The aspiration to avoid censorship, blocking, seizure or confiscation of its cryptos as much as possible may also be a determining factor.

Finally, it will also be necessary to determine his will to more agility, flexibility and adaptability in the realization of its succession planning.