This week we discover the vastly popular, yet elusive, world of cryptocurrency and how it relates to your estate plan. Simply stated, cryptocurrency is a nontangible form of currency referred to as “tokens”. Cryptocurrency emerged around 2008, when Satoshi Nakamoto created Bitcoin, establishing the first form of cryptocurrency (link). The purpose behind this invention, was not to establish a new currency, but rather create a place for peer-to-peer transactions. The idea being that brick and mortar financial institutions would eventually become obsolete. Bitcoin is one of the most popular cryptocurrency networks giving the cryptocurrency proponents some solid ground when it gained immense value in 2017. Before we delve deeper into understanding this unicorn of the financial world, please know that this is a very simplified explanation of how the system works. There are plenty of online resources available if you would like to learn about the technicalities involving cryptocurrency. You can start by reading here and here.
The assets are secured by a process called cryptography (code writing). These codes are extensive, complex and unique so that the chances of being hacked are slim to none. After acquiring the cryptocurrency, the asset owner receives a personal “key”, giving exclusive access to the currency. Without this private key, there is no way to gain access to the asset if the key is lost. Additionally, there is a public key/address given to other users (also created with complicated algorithms) who wish to send tokens (money) to another user. To learn more about private and public keys, read here. Additionally, users will have a digital wallet storing the unique private key, essential to receive the tokens. Therefore, if Jane sends tokens to Tom using Tom’s public key, Tom cannot receive those tokens until he accesses them with his private key (different code from the public key).
Why are we discussing this?
Now that we have given a brief explanation of what cryptocurrencies are, you may be wondering what this has to do with estate planning? Although, we are not trying to break into the world of innovating another type of cryptocurrency, understanding how cryptocurrencies work and how they could be relevant to everyday assets is a necessity for anyone in the business of financial planning. As of today, there are over 1,600 types of cryptocurrencies, and because anyone can create them (literally anyone), that number will likely continue to grow. Therefore, the probability of dealing with cryptocurrency in an estate plan becomes more likely every day.
4 Steps to Incorporate Cryptoassets into your Estate Plan
We incorporate our tangible assets into our estate plans, so why wouldn’t we incorporate those assets that are not yet tangible, but exist? Since cryptocurrency is still pretty new and is not used as a main form of currency as of yet