Self-custody of digital assets is somewhat similar to storing cash safely. However, because the former involves digital signing processes on specialised wallets that use private keys, things get complicated.
Private keys are long alphanumeric codes that act like passwords, and are used to authorise crypto transactions.
Keeping private keys secure on digital devices or on the cloud is not easy, and requires the deployment of meticulously planned safeguards and protocols. At the same time, sharing private keys with companies requires investors to be fully aware of the enterprise’s capabilities.
As the amount of digital assets under storage increases, the complexity amplifies manifold. It is for this reason that many large custody service providers of digital assets have emerged, to help owners keep their private keys safely.
There are several challenges around the delegation of authority to other users, and keeping track of and ensuring compliance with legal requirements. The other major challenge is succession planning for digital assets of individuals and family offices, and business continuity for digital asset businesses.
Challenges with succession planning
Digital assets exist in many forms: cryptocurrencies, non-fungible tokens (NFTs), tokenised securities, real world assets like stocks, social media accounts, and digital content which includes documents, art, images, etc. However, these assets are often overlooked in traditional estate planning, making their inheritance complex and challenging.
Here are a few of the key challenges around digital asset inheritance planning:
● Lack of awareness: many digital asset holders are not aware of the need to include digital assets in their estate planning. Others may not know how to go about doing the same.
● Evolving legal landscape: per the laws of succession, an intestate is a legitimate owner of properties and assets who has died without making a will. Personal inheritance laws such the Hindu Succession Act, 1956, the Muslim personal laws, etc., are applicable in this scenario. But the legal provisions for ownership and inheritance of digital assets are not clear as they are still evolving. It creates an environment of legal uncertainty about how these assets should be passed on to the heirs.
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● Identifying and accessing assets: for a legal heir, it’s difficult to identify and access digital assets that can be scattered over different platforms. Login credentials, security questions, and two-factor authentication can make the process even more complicated.
● Security and privacy concerns: if the owner shares private keys while they are alive, an heir could prematurely access the funds. Worse, the private key could be passed on to unintended persons. It raises serious security and privacy concerns.
Role of custodians
Digital assets are increasingly part of the investment portfolio of family offices and high-net-worth individuals (HNIs). Working with regulated custodians to ensure they pass on their assets to their heirs has several advantages.
● Clear ownership: Section 2 (h) of the Indian Succession Act, 1925, defines a will as, "... the legal declaration of the testator's intention concerning his property, which he desires to be carried into effect after his death." Taking inspiration from such laws, regulated custodians keep clear ownership records and separate customer accounts of digital assets in their custody. They can also advise owners on how they can incorporate digital assets in their inheritance planning. It ensures there is no confusion or legal issue with regard to inheritance.
● Integration with traditional wealth management: regulated custodians can integrate digital assets alongside traditional assets in an existing wealth management plan. It simplifies wealth management, including inheritance planning, for all assets.
● Tax efficiency: inheriting digital assets can have complex tax implications. However, custodians can help heirs save taxes on this count.
● Compliance and regulation: the landscape of digital assets is constantly evolving, with new regulations emerging frequently. Custodians stay up-to-date on these regulations and ensure proper compliance, mitigating any legal or tax issues during inheritance.
● Succession planning: custodians have created a nomination policy similar to the traditional ones, wherein all individuals can name a nominee, and digital assets are handed over to nominees upon the demise of the individual, following due procedure.
Regulatory and legal considerations
Laws about digital asset succession vary significantly from jurisdiction to jurisdiction. For example, India doesn’t have any specific laws for digital asset inheritance. Crypto and other digital assets are largely unregulated. It creates a complex situation for the inheritance of these assets as traditional inheritance laws may not apply to them.
However, there has been some progress on this front as discussions are reportedly ongoing at the government level for creating a regulatory framework for digital assets, including laws for their inheritance. The personal inheritance laws are expected to help the government frame inheritance laws for digital assets.
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In the United States, there is no federal law for inheritance of digital assets. Individual states are slowly moving towards enacting laws in this regard. For example, Alaska's Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). Although it doesn’t define inheritance rights, it facilitates a fiduciary's access to a descendant’s digital assets, for managing the estate.
The European Union (EU) addresses the digital asset inheritance issue from the perspective of data protection rights, as enshrined in the General Data Protection Regulation (GDPR). It provides for an individual's control over their personal data even after their death, which can play a role in how the issue of inheritance is dealt with.
Similarly, if we look at the distribution of inheritance in the UAE, a non-Muslim can leave a will specifying how his / her assets should be distributed. Else, it will be regulated by the Civil Personal Status Law and Abu Dhabi Law (14/2021).
Per these laws, inheritance is distributed among spouses, children, parents, and siblings, with equality between males and females. Regulated custodians can make these rights available to their users in the absence of clear guidelines.
Tax laws surrounding digital assets are another evolving area. Some jurisdictions might tax capital gains on inherited crypto assets, while others might have specific exemptions. Family offices and HNIs must work with regulated custodians or tax specialists in their specific locations to understand the tax implications of digital asset inheritance.
Technologies and inheritance
Custodians can create blockchain-based inheritance management systems using available and emerging technologies. These systems will ensure a hassle-free inheritance of digital assets leveraging smart contracts, multi-signature authentication, and decentralised identity management solutions.
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Smart contracts are already a big part of blockchain technology and can be used to automate inheritance agreements. Multi-signature authentication is another blockchain-based decentralised identity management solution, which can be used in digital asset inheritance.
Takeaway
For traditional assets, a legal succession plan can be executed with the help of local laws. However, in the case of digital assets held in an electronic wallet accessible with a private key, inheritance planning can be complex. Regulated custodians can help mitigate the challenges of digital asset inheritance, both for users and law enforcement agencies.
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