Cryptocurrency and assets that vanish

Most financial assets have an institution behind them. A bank holds a record, an executor produces documentation, and the account is released.

Self-custodied cryptocurrency does not work that way. Whoever holds the private key controls the asset, and if nobody holds it, the asset is permanently inaccessible.

Estimates of the proportion of Bitcoin considered permanently lost vary and are consistently substantial — lost keys, discarded hardware, and holders who died without passing anything on.

The two custody models

Exchange or custodial holdings. A company holds the assets on your behalf. There is an account, a login, and a business with a process.

These are recoverable in principle. Major exchanges have procedures for deceased account holders, generally requiring a death certificate and probate documentation.

The difficulties: exchanges are frequently in other jurisdictions, processes vary in quality, and exchanges themselves fail — several have collapsed, with customers becoming unsecured creditors.

Self-custody. You hold the private keys, in a software wallet, a hardware device, or written down.

This is the model cryptocurrency was designed around and it means there is no recovery mechanism. No customer service, no reset, no court order that produces the key.

The seed phrase

Most self-custody wallets are backed up by a recovery phrase — typically twelve or twenty-four words — from which the keys can be regenerated.

Anyone with the phrase has the assets. Anyone without it does not.

Which creates a direct tension: the phrase must be stored securely enough that it is not stolen, and accessibly enough that your executor can find it.

Approaches to passing it on

A sealed document with a solicitor or in a safe. Simple, and it depends on physical security and on the executor knowing it exists.

Splitting the phrase between two or more people or locations, so that no single person can access it alone. More secure, more complicated, and it fails if one part is lost.

Some approaches use a formal scheme requiring a defined number of shares out of a total, which tolerates the loss of some.

Multi-signature arrangements, where a transaction requires several keys. These can be configured so that a combination of trusted parties can access the funds after death.

More robust and technically demanding to set up correctly.

Specialist inheritance services, which exist and which introduce a counterparty you are trusting with a great deal.

A password manager with emergency access, holding the phrase, which is what most people with modest holdings should probably do.

What not to do

Do not put a seed phrase in your will. Wills become public documents after probate in many jurisdictions.

Do not store it in cloud storage or email in plain form.

Do not photograph it on a phone that backs up automatically.

Do not rely on your executor knowing what to do with it. Instructions matter as much as the phrase.

The instructions problem

Even with the phrase, an executor unfamiliar with cryptocurrency may not know what to do.

Leave written instructions: what you hold, roughly how much, what software or device is used, how to restore a wallet from a phrase, and a warning about scams, since the space is full of people offering recovery services who steal the assets.

Explicitly warn against entering a seed phrase into any website. This is the single most common way holdings are stolen, and a grieving non-technical executor is an ideal target.

The tax and legal position

Cryptocurrency is treated as property for tax purposes in many jurisdictions, which means it may form part of the estate for inheritance or estate tax, and disposals may trigger capital gains tax.

Valuation at date of death is required in many systems, and volatility makes this consequential.

An estate can face a tax liability on assets it cannot access, which is a genuinely bad outcome and an argument for making access straightforward.

Regulation is developing rapidly and differs by jurisdiction. Specialist advice is warranted for substantial holdings.

Other assets with similar characteristics

The problem is not confined to cryptocurrency.

Domain names, which lapse if not renewed and which may be valuable, particularly for a business.

Online business accounts — seller accounts, advertising accounts, payment processors — which may hold funds and may be closed for inactivity.

Loyalty and reward balances, which frequently expire on death or are non-transferable under the terms.

Prepaid balances on various services.

Digital media libraries, which are generally licensed rather than owned and non-transferable.

The proportionate response

If your holdings are trivial, note that they exist and do not over-engineer it.

If they are meaningful, the effort is warranted: a documented custody arrangement, instructions your executor can follow, and specialist advice on the tax position.

And do the sums honestly. An asset your family cannot access is worth nothing to them, regardless of what the balance says.

This is general information, not legal or tax advice. Regulation and taxation of digital assets are developing and differ by jurisdiction. Consult a qualified adviser for substantial holdings.