What is cryptocurrency?
We answer some frequently asked questions relating to cryptocurrency and consider what this means for estate planning.
The Bank of England explains that “the first part of the word, ‘crypto’, means ‘hidden’ or ‘secret’ reflecting the secure technology used to record who owns what, and for making payments between users.
The second part of the word, ‘currency,’ tells us the reason cryptocurrencies were designed in the first place: a type of electronic cash.
They exist electronically and use a peer-to-peer system. There is no central bank or government to manage the system or step in if something goes wrong.”
How does cryptocurrency work?
A cryptocurrency (or cryptoasset — the terms are used interchangeably) is a type of currency that uses digital files as money. It can be used as a form of payment that can be exchanged online for goods and services.
Cryptocurrencies work using a technology called blockchain, which is a decentralized technology spread across many computers that manages and records transactions. This means that they aren’t controlled by one person or government.
When can you use cryptocurrency?
As well as serving as an investment (albeit with notoriously volatile valuations), some household names are now accepting cryptocurrency from consumers directly buying their goods — including Expedia, Virgin Galactic and even some charities.
What is cryptocurrency in the eyes of the law?
A legal statement issued by the Chancellor of the England and Wales High Court in 2019 has confirmed what most probably already thought was the case, if asked:
- Cryptoassets are to be treated from a legal perspective as ‘property’; and
- Cryptoassets can be owned by an individual.
Whilst seemingly obvious, this has important and far-reaching consequences that are only starting to be fully understood.
In very simple terms, what this means is that:
- Property can be gifted or transferred to others, including by orders of the court (e.g. on divorce);
- On death, cryptoassets will pass in accordance with a will, or in accordance with the intestacy rules if the deceased did not have a will;
- Cryptoassets are taxable;
- Cryptoassets can be held in a trust, for example in a trust set up for the benefit of your children or grandchildren; and
- If mental capacity is lost, an attorney acting under a registered lasting power of attorney for property and financial affairs, would be able to make decisions in relation to cryptoassets, as would a deputy in the Court of Protection.
This is a fast-moving area of law and one that will catch many by surprise if not planned for.
For more information on cryptocurrency and digital assets in relation to estate planning, speak to our expert private wealth lawyers.