In this new era of cryptocurrencies and digital money, the question of funds security and inheritance is as pressing as ever.
In February 2019, the crypto community was stricken by the news of the BTC trading platform Quadriga losing $180 million worth of coins due to its young founder’s death.
Gerald Cotten was only 30 years old and it turned out that he was the only one who knew the password to access the platform’s funds. Thus, the project went bankrupt and its users lost their funds as well.
How could such a thing have happened in the first place? A lack of an inheritance plan is the key.
If you are a cryptocurrency owner and bitcoins make up a significant portion of your wealth, it’s worth considering inheritance planning even if you are young.
In this article, we are going to review cryptocurrency specifics, where and how digital coins can be stored and give some instructions for those who are worried about their funds’ security and accessibility in case of unforeseen circumstances.
Bitcoin: the digital currency of the new age
First of all, we’ll give a very brief introduction to what cryptocurrencies are and what makes them different from traditional means of payment.
For those looking for a more detailed explanation about blockchain and how it works, please refer to our last section titled “Blockchain Basics.
Bitcoin represents a peer-to-peer version of electronic cash. And while traditional or “fiat” money is always backed and controlled by the issuing government, Bitcoin does not belong to any authority in particular.
The key take way is personal sovereignty- you are in complete control of your funds. However this sovereignty comes with personal responsibility, the need to protect your funds adequately.
Where cryptocurrencies can be stored
Now that we have some basic understanding of cryptocurrencies, let’s define how and where they can be stored.
Since Bitcoin is merely a piece of code, it cannot be “stored” anywhere in the same way that you keep dollars or pounds in your wallet. However, it doesn’t prevent numerous projects from creating cryptocurrency wallets giving you the sense of something real. A true paradox, the way it is.
To access your crypto funds or to transfer them to someone else, you need to know the public address and the private key. Cryptocurrency wallets are designed to store them both conveniently in a single place. With the rise of the new technology, many different types of such wallets have been created. They can be classified into 5 major groups.
These are the wallets provided by exchange platforms and different online services. They are pretty convenient and don’t require any additional technical skills. However, they have the lowest level of security as such services are hackers’ most favorite target. It’s recommended to use such wallets for storing small sums for daily use.
Examples: Coinbase, Bitstamp, BitFinex, Binance.
These wallets are even more convenient than the previous ones as they come in the form of mobile applications which make it possible to access your funds ‘on-the-go’. Since phones often get lost or stolen, such wallets are not recommended for big sums as well.
Examples: Mycelium, Coinomi, Electrum, Jaxx, CoPay.
Such wallets represent desktop applications. The level of their security depends on your accuracy. If you don’t visit suspicious websites and regularly run an antivirus check, most likely, your funds will be pretty secure. However, there is still a risk of your hard drive being crashed, so don’t forget to make numerous backups.
Examples: Exodus, Multibit, Bitcoin Core, Armory.
These come in the form of an encrypted USB drive that has no access to the internet and thus regarded as most secure. Ledger Nano S and Trezor are two of the most popular hardware wallet providers. Consider purchasing yourself one of these for storing large amounts of crypto.
Examples: Ledger Nano S, Trezor.
Unlike hardware wallets, paper wallets will cost you nothing. All you will need to do is to generate a wallet on an appropriate online service and print it on a piece of paper. This will also protect your funds from hackers. But keep in mind that paper is not a durable type of material, so consider laminating it and storing it in a safe or in a bank deposit.
Some tips to protect your digital funds
Once you have selected a wallet to store your digital funds, it’s time to think about security.
As it’s already been mentioned above, with cryptocurrencies, there is no central bank to control your funds, and therefore no authority to protect them if they’re stolen.
This makes Bitcoin a juicy target for hackers of all sorts.
The good news is that the security of your funds is still in your hands. If you implement at least a couple of tricks to protect your money, most likely, no one will even try to break through the first wall of your defense preferring easier targets which are still aplenty.
Here are some basic tips and tricks that can help you make your bitcoins more secure.
Divide your funds among several wallets
According to folk wisdom, one shouldn’t put all their eggs into one basket. This idea is very well applicable in the case of cryptocurrencies.
Divide your funds and distribute them across multiple wallets. Thus, if hackers get to break into one of your accounts and steal your bitcoins, you will still have the rest across your other wallets.
Set up 2FA where it’s possible
2FA is an abbreviation that stands for “two-factor authentication”. It implies entering a one-time-use code in addition to your main password to get access to your account. This code is usually sent to your mobile phone via SMS or generated in dedicated mobile apps such as Google Authenticator.
Most of the online exchange platforms have this option.
If you set up 2FA, it is highly recommended to log into your account from time to time to make sure that nothing went wrong with the apps’ synchronization and you still are able to access your funds.
Use a paper wallet
As it’s already been said above, paper wallets are so far the safest way to protect your funds against hackers. However, due to the fragility of the material, you should also take some additional precautions.
Print several copies of your wallet, laminate the paper and store it in a safe place (in a safety deposit box or secure safe).
Install all security updates
If you store your funds on desktop or mobile wallets, make sure that you install all the security updates. However, not all updates are equally useful and sometimes they may bear some untested vulnerabilities.
Don’t rush to install a new version of the app as soon as it is released. Wait for at least a few days and monitor comments in the AppStore. The active audience is usually pretty quick in catching up with any bugs, so if there are any breaches, be sure that someone will mention them.
Make numerous backups
If you prefer convenience over security and store your bitcoins on desktop or mobile wallets, make sure to back them up.
Typically, such wallets provide you with the so-called ‘seed-phrase’. It’s a mix of 12 or 24 words that are unrelated to each other. Write them down or print on a paper, make several copies of this phrase and store it in different locations.
If your wallet is crushed and you lose access to your funds, in order to restore them, all you will need to do is to re-install the app and enter your seed-phrase at the first login.
The legal status of cryptocurrencies
Another useful piece of advice is to study the legal status in your home country.
The speed of new technology development makes it hard for authorities across the world to come to a consensus on how to treat cryptocurrencies from the legal perspective.
Since cryptocurrencies are still not recognized as legal tender in most places, studying the laws regulating this area is a very important part of a Bitcoin inheritance plan.
USA: In the United States, there is no consistent opinion on the legal status of cryptocurrencies across different governmental organizations.
The Internal Revenue Service (IRS) calls Bitcoin a property, the Securities and Exchange Commission (SEC) says that all digital tokens are securities.
The Commodity Futures Trading Commission (CFTC) defines Bitcoin as a commodity.
However, this country has moved much farther than the rest having at least given a legal definition to cryptocurrencies. This makes it much simpler to launch a blockchain-based startups here than anywhere else.
UK: The United Kingdom doesn’t recognize BTC as legal tender either, but the authorities have issued some recommendations on how digital funds should be treated. Also, the UK has the highest concentration of crypto-ATMs among all European countries and so far provides the most fruitful environment for Bitcoin enthusiasts.
A friendly bunch: There’s a number of countries that are more loyal to Bitcoin and crypto-startups than the others. Local authorities are eager to embrace new technologies and create good conditions for the future legalization of cryptocurrencies.
Among them are Malta, Switzerland, Japan, Singapore, Belarus, Germany, and Hong Kong.
Cryptocurrency investors and businesses accepting Bitcoin have to pay little to no taxes on their gains here.
Moreover, some banks such as Japanese Mitsubishi UFJ and German Fidor experiment with new payment methods. So if you are lucky to be a resident of one of these regions, setting up a legal inheritance plan for your crypto-funds should not be a problem.
The unfriendly bunch: The countries that prohibit cryptocurrencies at the official level include China, India, Egypt, Algeria, Morocco, Nepal, Ecuador, Pakistan, and Vietnam.
Trying to set up an inheritance plan for cryptocurrencies in a legal way may result in negative consequences here, so you should rely only on those who you can trust, i.e. your friends and relatives.
A step-by-step Bitcoin inheritance guide
Finally, we get to the topic of Bitcoin inheritance planning. Once you’ve found out the legitimate status of cryptocurrencies in your region, follow these instructions to ensure your digital funds will not be lost in case something happens to you.
Select a person to whom you can entrust your digital funds.
This may be your wife, parents, close friends, or possibly a trusted attorney. Make sure that you can fully rely on them.
Write instructions on how this person can access your funds.
These instructions should include the information on where the currency is stored, all the pin-codes, seed-phrases, and passwords to these accounts.
If you have 2FA enabled, link Google Authenticator on his or her mobile phone to your crypto wallet.
Talk to this person and make sure that your instructions are clear enough.
Open a bank deposit.
Sure, you will hardly find a bank that will agree to take your bitcoins for safekeeping. But you may still consider locking the instructions you’ve written in a safety deposit box.
If you store significant sums of crypto on hardware or paper wallets, you may leave them in the bank deposit box as well.
Make a will for this person to inherit your crypto funds.
Due to the questionable legal status of cryptocurrencies, you will find no notaries to pass on bitcoins as digital funds.
However, there’s no one to prevent you from passing on a digital asset. And this is exactly what your instructions will be.
In the will, don’t mention the detailed guide on how your funds can be accessed, as it becomes a public document after death.
Simply pass on the access to your bank deposit with the instructions in it.
Bitcoin asset custodian services
If all the security hacks and technical details are too much for you but you are still inclined on securing your digital funds, you may also consider using custodian services.
Investopedia defines custodian services in the world of traditional assets as a financial institution that holds customers’ securities for safekeeping in order to minimize the risk of their theft or loss.
When applied to the world of digital resources, the essence of these services remains the same. Crypto custodians may give you peace of mind and take all the worries for securing your digital funds on themselves.
Typically, such companies focus on institutional investors or high net worth individuals. They know all the best practices of protecting cryptocurrencies and stay on top of all the latest security trends.
Below are listed some of the best companies providing Bitcoin custodians services.
- Coinbase: This is one of the biggest and most reliable US-based platforms for buying bitcoins. In addition to web-wallet, it also offers custodial services for cryptocurrency investors. The main reason for launching this service is the interest of institutional investors towards crypto.
- BitGo: This crypto custody service is considered to be one of the best with cold storage solutions and sophisticated security controls. It’s been in the market since 2012 and apart from Bitcoin, it supports 100+ cryptocurrencies.
- Gemini: A reputable US-based cryptocurrency exchange platform has recently started offering custodial services as well meeting its customers’ demand.
- DACC: It’s a relatively new service that was launched in 2018, but it has already proved to be quite secure. Also, it offers its customers the high-level support, insurance and reports on their assets’ condition.
Blockchain-based solutions for cryptocurrency inheritance
If outsourcing your crypto funds’ security is not something you are ready to put up with and you may want to make use of some of the latest technological inventions.
Here are some of the most advanced blockchain-based solutions to consider
The custodial services imply the necessity to entrust your funds to the third-party though a lot of their tasks can be automated. So it would be surprising if no blockchain solutions were invented for this purpose. Below are listed some of such solutions.
TrustVerse is a blockchain-powered AI platform for asset management. Investors can make use of this smart contract-based solution to manage taxes, plan inheritance and transfer their digital assets to entrusted parties.
You may utilize its private family smart contract that relies on the proof-of-death in order to release the digital funds to your heirs.
In addition, the platform offers a set of tools to help cryptocurrency investors manage taxes, conduct legacy planning, transfer and inheritance of their funds. Also, the smart-contract that underlies the service automatically reaches out to your beneficiaries in case you don’t check in for a certain period of time.
Safe Haven is another blockchain-based platform that helps its users to protect their funds by assigning roles of beneficiaries who will inherit your cryptocurrency in case of your death. The service utilizes different protocols such as TFC Share Distribution Key, Trust Alliance, and Escrow in order to store information about digital assets safely in an encrypted way. Meanwhile the shares of the keys to the assets are managed as a legal document by a notary.
Casa Covenant is a Bitcoin inheritance protocol that can be seamlessly integrated into existing legal systems and enables secure inheritance with the help of the MultiSig technology. Casa comes with 3 subscription-based plans that cover different levels of security and dedicated 24/7 service.
Creating An Inheritance Plan Today
Cryptocurrencies may be tricky, and with the death of the owner, his or her digital savings may easily be lost if no precautions are taken beforehand.
If you have a significant portion of the money invested in Bitcoin or other cryptocurrencies, we strongly encourage you to make your own research.
This article may serve just as an introduction to the world of new payment technologies. You may do your own research by reading books. Cryptoasset Inheritance Planning: a simple guide for owners may give you some more details on this question.
If you are not planning to get too much involved into cryptocurrencies, but still want to protect your funds, you may hire an attorney estate planner or contact us by filling in the form below. Leave your contact details and one of our specialists will contact you shortly.
Introduced as a concept by an anonymous group of people under the name of Satoshi Nakamoto in 2008 and released to the broad publicity a year later.The new digital currency was invented as a response to the global financial crisis.
It has become obvious that centralized institutions can no longer be fully relied upon, and the demand for the decentralized currency gave birth to this new means of payment.
Here are some of its features.
Based on the blockchain technology.
This is the key invention of Satoshi Nakamoto that makes it possible to transfer funds on a peer-to-peer basis. Briefly speaking, this technology represents the chain of blocks that are used for storing transactional data.
Whenever someone sends bitcoins over the network, a new line is added to each of these blocks with the details of the transaction: sender’s and recipient’s wallet addresses, the amount of money transferred, the exact time when the transaction occurred, etc.
While this information is available for anyone on the web for verification, within the blocks themselves, it is stored in an encrypted way, which makes it very hard to be hacked or altered. This is what makes the system so secure and allows trustless transactions.
Blockchain.com: knowing the ID of the transaction, one can easily verify the date when it was made and all other details
New coins are created by mining.
In order to add a new block to the network, users’ machines all over the world resolve complex computational tasks to find the “key” to this block. This process is called “mining” by analogy with the real-world gold obtaining process.
Bitcoin’s network can be considered fully decentralized with thousands of miners contributing to the network all over the world.
Once the transaction is confirmed by the required number of blocks, it cannot be undone. In order to do that, one should gain control over at least 51% of the whole network which is impossible due to its decentralized nature.
Bitcoin can be sent to anyone anywhere in the world in a matter of a few minutes. Also, without centralized banks to control the digital currency, it is now possible to send payments overseas giving away only a small fee to the network.
This Bitcoin’s feature emanates from its decentralization. In order to modify transactional data, hackers would have to break into more than half of all the blocks which is very difficult and economically inefficient.
Bitcoin’s code is open-source, This means that anyone can use it as a basement to create their own projects. At the time of writing, there are more than 3,000 projects listed at CoinMarketCap and all of them started off as Bitcoin’s derivatives.