Digital assets, NFTs and the importance of keeping secure records

 28 October 2021
Digital assets, NFTs and the importance of keeping secure records

Back in May this year, a viral video clip of a baby biting his brother’s finger sold as a “non-fungible token” for an incredible $760,999. As the New York Times reported, the auction of the 2009 video clip:

“Allowed bidders to “own the soon-to-be-deleted YouTube phenomenon” and be the “sole owner of this lovable piece of internet history.”

It’s not just videos that have sold for eye-watering sums. Digital assets sold using cryptocurrency exchanges and Non-Fungible Tokens (NFTs) include memes, digital artworks and collages. It is a highly speculative market, with some investments increasing in value by 1000%.

Despite the risks, Non-Fungible Tokens (NFTs) have become popular with the FIRE generation (Financial Independence Retire Early). Indeed, the Lexology website estimates that 20% of the UK population now own some form of digital asset, including cryptocurrency.

 

Digital assets and your will

One of the major concerns around valuable digital assets and NFTs is that there is no controlled register of ownership which records who owns what. Instead, each purchaser has a private key, consisting of an alphanumeric password used to access digital assets held in their digital wallet.

Unless you store details of your digital asset keys and wallet securely, you cannot prove your ownership and access your assets. It has been estimated that some £23bn of Bitcoin have been lost simply because account details have not been kept and forgotten.

As a Lexology article points out:

“It is going to be extremely important to keep this (crypto assets) inventory up to date and to provide details of how to locate the private keys, the various wallets and exchange passwords. This in itself then becomes a very sensitive document and advice should be taken on how to preserve confidentiality, while allowing access in the event of death”

 

Private keys and your will

It’s important to remember that after your death, your Will becomes a public document, so you should never put the private key codes for your crypto assets into your Will text. That’s why some cryptocurrency companies are trialling “multi sig accounts”, which allows someone to hold an emergency back-up key to the crypto wallet, such as your attorney/s on your financial Legal Power of Attorney (LPA).

 

Digital assets and tax

Tax law is still playing catch-up with the fast-paced world of NFTs and crypto assets, including the thorny issue of wildly fluctuating values and the question of where in the world the asset is actually held.

According to Satjivan Aujla, associate at Boodle Hatfield in an article for the Financial Times:

“Cryptocurrencies such as bitcoin are considered by HMRC to be property for inheritance tax (IHT) purposes which means they form part of your partner’s taxable estate on death.”

However, despite the fact that IHT ‘loss on sales’ relief applies when assets decrease in value between the death of the owner and the sale of the assets, this relief is not currently applicable to cryptocurrency.

 

Digital art: money to burn?

The value and format of digital artworks can seem to defy logic. Back in March 2021, a Banksy print was set alight live on Twitter, and thousands watched it reduced to ashes.

Why? According to an article in The Guardian:

“A company called Injective Protocol … bought the print for $95,000 in order to destroy it and replace it with a unique digital facsimile. This is called crypto art and, if you want to know the extent to which it’s booming, well, the new work just went for $382,336, more than four times the original price.”

 

An innovative investment?

Digital art mirrors the physical artwork in terms of spotting future stars.

For example, an artwork by collage artist Beetle which was bought for $67,000 in 2020 sold for a massive $69,346,250 in February 2021.

Beeple’s “Everydays: The First 5000 Days” was sold at Christie’s, the first purely digital artwork (NFT) ever offered by the world-famous auction house. As Noah Davis, specialist in Post-War & Contemporary Art at Christie’s in New York explained:

“Acquiring Beeple’s work is a unique opportunity to own an entry in the blockchain itself created by one of the world’s leading digital artists.”

And musicians are getting in on the act too, with rock band Kings of Leon releasing their new album, When You See Yourself, as NFTs.

“While the album is available through Spotify and other retailers, the NFT versions offers various extras, including digitally moving cover art and a vinyl version, all for $50. ….The NFT versions will only be made for two weeks, thus restricting supply and, you’d think, increasing their value.”

 

Hold on, what is a blockchain?

The blockchain mentioned by Christie’s above is simply the mechanism by which digital assets can be traded. IBM define a blockchain as:

“A shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.”

 

I think I need to lie down in a dark room for a while…

If you find all the world of digital assets confusing, it’s not surprising. The whole concept is in its relative infancy, but it’s growing up fast. Even if you don’t own a single digital asset, if you are an executor of a will for someone else, you may encounter digital assets in their estate.

 

The golden rule of crypto assets

If there is one aspect that isn’t going to change, it’s the vital importance of keeping those private key passwords safe, up to date and accessible to your executors. Without the private keys codes, you, your executors simply cannot prove ownership, and therefore cannot reassign ownership or sell the asset.

If you are concerned, it’s worth doing some research into crypto wallet security, talking to a specialist solicitor, or contacting a reputable digital security company about ways to keep these details safe and secure.

Updating your will with new assets

If you want the next generation to benefit from your entire portfolio of assets, physical or digital, you should review and update your Will regularly. You should also talk to a professional estate planner to ensure the provisions you have made will take into account any new or updated assets.

If you want to alter, update or rewrite your Will, contact us at Panthera Estate Planning. We offer an informed, pragmatic and thorough approach to detailing, ring fencing, and protecting all your assets for your beneficiaries.

 

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At each stage of the process, Paul Hammond - the Directory of Panthera, explained in simple understandable language what was going to happen and if there would be any complications. None happened, I am sure, because of his eye for detail.

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