Synopsis
- This paper serves as companion to the Leo Cussen Centre for Law Seminar on Cryptocurrency and Digital Assets, delivered on 16 February 2022 by John O’Halloran.
- The nature of cryptocurrency, digital assets, and digital records is that the law relating to these technological advancements is evolving. However, the prevalence of digital assets means that practitioners cannot afford to ignore this area. Failure to understand the technology, update knowledge, or appropriately obtain instructions, can have serious consequences.
- Consider the consequences of the following estate transaction errors for a firm:
- accidental deregistration of a security interest on the Register of Titles;
- failure to transfer the right shares in real property to the right beneficiaries; or
- transferring a sum of money intended for a beneficiary to the wrong bank account.
- The price of 1 BTC (Bitcoin) at its highest, was about $88,000.00 AUD. Dealing with cryptocurrency in the wrong way might render it irrecoverable and practitioners should exercise caution. Practitioners should consider the liability exposure that comes with handling cryptocurrency and take appropriate steps to minimise risk.
Cryptocurrency: An Introduction
A. Conceptualising “assets” and “records”
- A universal definition of “digital record” and “digital property” are elusive at law.
- Practitioners should consider the conceptual difference between a “digital record” and “digital asset” in the context of estates matters. A New South Wales Law Reform Commission Report makes a helpful distinction between the two.
- Digital records may include items that are not strictly the user’s property, e.g.:
- social media accounts and profiles
- digital music and eBook collections
- online purchasing accounts, such as Amazon and eBay
- loyalty program benefits, such as frequent flyer points
- sports gambling accounts; and
- online gaming accounts and avatars.[1]
- Digital assets are digital material in which users have proprietary rights or interests, e.g.:
- cryptocurrency; and
- digital photos or digital artwork.[2]
- Estates practitioners need not be experts in end user licence agreements (EULAs). However, practitioners should inform clients that certain digital records might be subject to a EULA and not be the property of the client and therefore cannot be properly transmitted upon death. The extent of how much advice is required will depend on the type of digital assets the client has and their estimated value.
- Practitioners should also consider the usual duties of a personal representative: verifying and filing an inventory of the estate, paying debts, calling in assets, preserving assets and exercising care and skill.[3] It is only a matter of time until the common law recognises digital assets (and possibly digital records) as part of these obligations and duties with their increasing value.
B. Cryptocurrency systems
- Cryptocurrency is a collective term. There are many separate cryptocurrencies such as Bitcoin or Ethereum.
- Cryptocurrencies run on a protocol known as the blockchain.
- Blockchain:
- shared database;
- stores data in “blocks”;
- blocks are linked together via cryptography (a security mechanism);
- data is entered onto a block and once filled, it is chained onto the previous block;
- cryptocurrency blockchains are decentralised and no single user has control over the blockchain; and
- data that is entered is irreversible.
- It is helpful to think of the blockchain as a publicly available, yet secure, ledger.
- Mining:
- process by which transactions verified on the blockchain;
- verifies information through algorithms;
- miners rewarded by cryptocurrency, but deflationary measure in most systems halves reward;
- after rewards extinguished, miners will continue to verify transactions via fees to verify transactions; and
- massive environmental impact and growing source of controversy.
- Your client will own cryptocurrency (e.g., ₿1.50) via their wallet.
- Wallets:
- can be linked to the internet (hot wallet);
- can be unlinked (USB stick, HDD, paper, offline computer);
- danger if wallet is lost – you will lose cryptocurrency and there isn’t a ‘big four bank’ to get on the phone with; and
- if cryptocurrency sent to the wrong wallet or invalid wallet, it is lost or burned.
C. Main cryptocurrencies
- In currency markets, there is fluctuation. In cryptocurrency markets, there is volatility. What is a “mainstream” cryptocurrency will evolve. Fringe cryptocurrencies are termed “alternative coins” or “altcoins”.
- Some popular or “mainstream” cryptocurrencies are as follows:
- Bitcoin (BTC);
- Ethereum (ETH);
- Binance Coin (BNB);
- Tether (USDT); and
- Solana (SOL).
Drafting the Will: Instructions and Advice
- As practitioners will appreciate, some clients will not own any cryptocurrency and will instead be concerned with what happens to their online cloud storage, photo libraries, and social media accounts.
- Practitioners should consider the questions to be asked of clients. Produced below are some checklists to bear in mind when interviewing and advising the client.
- Fig. 1: Sample digital record (and asset) instruction checklist.
- Fig. 2 contains an instruction checklist for cryptocurrency.
- Figs. 3 & 4 contain sample authorising clauses and a digital asset plan.
A. Taking instructions
- This instruction checklist contains basic points to canvas with the client. As explaining the difference between an “asset” and “record” before taking instructions can be confusing, the below checklist posits questions about the client’s digital assets and records together.
- After instructions are obtained in accordance with Fig. 1, one could advise the client on the method(s) contemplated in Figs. 3 & 4.
Fig. 1: Sample digital record (and asset) instruction checklist
Social media, online accounts, and cloud data storage
Does the client have social media accounts?
Has the client nominated a “legacy contact”? If so, whom?
What does the client want to happen to these accounts upon death?
Does the client have an e-book or digital music collection / account?
Explain to the client that this data may not be transmissible upon death pursuant to a EULA.
The client may wish to contact the service provider directly as to their policies about account holder death.
Does the client have cloud-based file storage?
Is there any sensitive personal, medical, or financial information contained in the cloud storage?
What does the client want to happen to this data?
Instructions on accessing accounts
How does the client keep passwords for these accounts?
Password manager, paper backup, or memory alone.
Does the client have a plan for how the personal representative will access their passwords upon death?
If not, explain the utility of a password manager, or passwords in a sealed envelope or safe (with code given to solicitor and personal representative).
B. Taking instructions: Cryptocurrency
- While a client that invests in cryptocurrency is far likelier to have a good understanding of technology, practitioners should not assume that clients have thought about the practical aspects of transmitting cryptocurrency upon death.
- Fig. 2 contains the rudimentary questions to be asked of a client in relation to their cryptocurrency portfolio, if any. Following the instructions in Fig. 2, Figs. 3 & 4 could be discussed, along with taxation implications on the transmission of cryptocurrency.
Fig. 2: Sample cryptocurrency instruction checklist
Details of cryptocurrency portfolio:
Does the client have cryptocurrency?
Obtain instructions as to current portfolio value.
What cryptocurrencies does the client have? Multiple?
Accessing the portfolio upon death:
Access instructions: how does the client access the portfolio?
Does the client have a hot wallet or a cold wallet?
Has the client considered how the personal representative will access the portfolio?
Has the client considered whether the personal representative has the knowledge, skill and ability to effect a sale of the cryptocurrency?
Gifting the cryptocurrency:
Whom will the assets be given to upon death?
Has the client considered that, if the cryptocurrency “crashes” when the Will is being administered, that might that a negligible asset to a beneficiary or beneficiaries is gifted?
Has the client considered that, if the cryptocurrency “crashes” when the Will is being administered, that might that a negligible asset to a beneficiary or beneficiaries is gifted?
Engaging an agent:
Does the client have a preferred agent to sell the Bitcoin?
The personal representative might not have the knowledge or skill to sell cryptocurrency.
Flag with the client the liability of a personal representative in dealing with estate assets.
C. Authorising clause
Drafting the Will
- Do not include access details to digital assets or records in the will. Once probated, a will is public.
- The Digital Asset Plan should not be incorporated into the will by reference but should be treated similarly to a side-letter or letter of instruction.
- It is important that access to records and assets are authorised. Intention should be noted, but the asset plan should not be incorporated into the will.
- Consider the need for an indemnity for the executor / trustee with the client. Discuss with them how a EULA might be breached and the consequences that flow for indemnity. These possibilities might seem remote today but might become legal battlegrounds in the future.
- Important considerations in drafting:
- Is administration of digital assets and records authorised?
- Is intention as to administration noted?
- Is the digital asset plan incorporated into the will?
- Is there an indemnity for the executor / trustee?
Fig. 3: Example authorising clause and indemnity
WILL OF CHARLES DAY
I AUTHORISE my Trustees to access any of my electronic devices or online accounts for the purposes of administering my estate and dealing with my digital assets.
I REQUEST but do not require my Trustees to administer my digital assets in the manner set out in a document dated 27 January 2022, entitled DIGITAL ASSET PLAN signed and dated by me and kept in [location].
PROVIDED THAT my Trustees have not acted dishonestly or in a wilful commission of a breach of trust, my Trustees shall not be liable for any loss or liability occasioned by breach of a term of use, copyright breach, or breach of an end user licence agreement in relation to any of my electronic devices or online accounts for the purposes of administering my estate and dealing with my digital assets.
Fig. 4: Separate Digital Asset Plan
CHARLES DAY – DIGITAL ASSET PLAN
My usernames and passwords are stored in my Secure Password Manager Application (App).
The App is stored on my Personal Laptop and my Personal Phone.
My solicitors, Wedderburn & Wedderburn Lawyers, hold an envelope containing the passwords, PINs and computer login details for my devices and the App (Login Details).
Backups of the Login Details and One Time Use Backup Recovery Keys for my App are located at my home, 100 Smith Avenue, Melbourne, VIC 3000 in a safe, passcode CRYPT9182
Taxation Implications
- Practitioners should be familiar with the taxation implications of cryptocurrency upon death to ensure that taxation issues are appropriately managed.
- The real issue for practitioners to identify is any liability for Capital Gains Tax (CGT), ordinarily payable on disposal of a CGT asset.
- Ordinarily, capital gains are made if the proceeds from the sale of a CGT asset exceed the cost base of the CGT asset.
- The Income Tax Assessment Act 1997 (Cth) (Income Tax Act), s. 128-10 provides that upon death, a capital gain or capital loss from a CGT event that results for a CGT asset the deceased owned just before death is disregarded.
- Where cryptocurrency is distributed to a beneficiary in accordance with s. 128-15(3) of the Income Tax Act via a Will or on an intestacy, a CGT exemption (rollover) will occur.
- Where cryptocurrency is sold as an estate asset, there will be a CGT liability and that will be paid out of estate funds.
- Practitioners should discuss with the client the obligation with all CGT assets to keep appropriate records under the Income Tax Act. They should ask the client whether they ordinarily engage an accountant and where CGT records are kept (e.g., at accountant’s office, on computer).
Australian Taxation Office Position:
- The ATO has an entire portal on the tax treatment of cryptocurrencies. Not only is it a useful overview for practitioners, the ATO has provided information on their position on cryptocurrency.
- Particular attention in the estates context should be directed to the ATO’s position on record keeping, here and the ATO’s determination on bitcoin as a CGT asset for the purposes of s. 105-5 of the Income Tax Act, here.
Getting it Wrong: Risks
- There are two thematic risks for practitioners:
- Failure to draft the will properly; and
- failure to hold passwords and access information properly.
A. Failure to draft will properly
- Practitioners should consider the effect of the principle in Hill v Van Erp (1997) 188 CLR 159. A breach of retainer by failure to use reasonable care in the preparation of a will is also a breach of the solicitor’s duty to an intended beneficiary who suffers foreseeable loss.
- Failure to draw the will properly to enable access to digital assets may lead to liability if the assets are dealt with wrongly or the will does not enable access.
- A will dealing with cryptocurrency and digital assets should be careful to ensure access is maintained and that the property will go to the intended beneficiaries.
B. Failure to hold passwords
- Figs. 3&4 in this paper identify a way a solicitor might hold an envelope containing access details.
- Regardless of whether this methodology is used, a practitioner should be careful to ensure that the client is advised about passwords and information access.
- A recommendation to engage an external IT consultant may be prudent, together with a written file note confirming the provision of that recommendation.
- Where the will does not enable, or properly effect access to, valuable digital assets (cryptocurrency), liability and disciplinary action may flow.
Author Contact Details
John O’Halloran, Barrister at the Victorian Bar can be contacted via his clerk, chris.chapman@vicbar.com.au, by email: ohalloran@vicbar.com.au, or via his mobile: 0403 272 775.
Liability limited by a scheme approved under Professional Standards Legislation.
© John V. O’Halloran (2022)
[1] New South Wales Law Reform Commission, Access to Digital Records Upon Death or Incapacity, Report No. 147, December 2019, p. 3.
[2] New South Wales Law Reform Commission, Access to Digital Records Upon Death or Incapacity, Report No. 147, December 2019, p. 3.
[3] New South Wales Law Reform Commission, Access to Digital Records Upon Death or Incapacity, Report No. 147, December 2019, pp. 13-14.
