Great estates – How to handle cryptocurrency in executries

In this article, Lockton explores some of the risk management considerations for private client practitioners when dealing with cryptocurrency forming part of a deceased estate.

Cryptocurrency (‘crypto’) has evolved quickly, from a niche interest for those with advanced technical knowledge, to a more widely used form of investment. It follows that those in the private client field now increasingly see estates that include some form of crypto.

Forms of crypto itself are complex and ever evolving, as new platforms hosting crypto are being developed all the time.

With this in mind, what do private client practitioners need to look out for?

Anti-money laundering (AML) and source of funds wealth: assess the risk

Crypto itself and assets derived from crypto are subject to the same requirements in terms of anti-money laundering regulations and the Proceeds of Crime Act 2002. The overarching considerations are therefore the same as with any client matter, in that it is important to take a risk-based approach and carefully consider and document decisions on source of funds/source of wealth.

Crypto can of course be a legitimate form of wealth that can be accumulated, traded with and converted to a standard currency to purchase other assets, all of which may be entirely lawful. Cryptoasset service providers wishing to operate in the UK must also be registered with the FCA to operate lawfully and are therefore subject to regulatory requirements. However, crypto is always a higher risk factor to be considered during initial risk assessments as it has characteristics that make it more likely to raise red flags and require further scrutiny. It is more likely to be used on the dark web for illegal purposes and is favoured by criminals for use in money laundering, it fluctuates in value very quickly and it can afford holders a greater level of anonymity, which makes identification checks harder.

Enhanced due diligence

Solicitors should refer to the guidance from the Legal Sector Affinity Group (LSAG), which is made up of all UK AML regulators, including the Law Society of Scotland. Practices should strongly consider enhanced due diligence (EDD) measures when any sources of funds/wealth are derived from or via crypto, and should follow the Law Society’s guidance in this area. The Law Society’s AML FAQs includes a detailed section on cryptocurrency; see Anti-money laundering FAQs.

Where the crypto held by a client has a complex transactional history, a blockchain analysis company can provide a specialist report tracing the crypto transactions and the ultimate source of the funds. It might be prudent to ask your client to provide such a report or to give authorisation for you to instruct one. 

Essentially, where crypto is involved in an estate, there are additional considerations that will need to be addressed and documented in a full risk assessment. With this in mind, think about whether you have the capacity to deal with the work where crypto is involved or whether you should decline the instruction. Is it within your firm’s risk appetite? Consider whether your teams would benefit from training to bring the work within risk appetite in the future.

Crypto and will drafting: key points

When instructed to prepare a will for a client, a potential problem for executors and representatives is accessing crypto after the testator has died. There have already been publicised accounts of situations where highly valuable crypto could not be accessed for beneficiaries because no one knew the deceased’s private keys or passcodes. You might want to consider advising your client to put these safeguards in place:

• Make sure your client has stored login details and private keys in some form of password manager or secure document that the executor knows how to access.
• Advise them to give the executor authorisation to use password manager and access digital accounts.
• Include specific provision in the will about how digital assets, including crypto, should be managed.
• Ideally, your client should nominate an executor who has the technical knowledge to understand and access the crypto.
• Check if the relevant crypto platform allows the testator to assign a legacy contact.

Executries and crypto: practical suggestions

All Law Society rules and guidance applicable to executries will apply, whether an estate includes crypto or not. However, where crypto is involved, its particular characteristics may bring some principles into sharper focus.

1) Jurisdiction issues

First, you may need to consider jurisdiction issues. Where is the crypto currency located? Can it be established that the crypto is located in Scotland for the purpose of the estate?

If the crypto is located outside of Scotland, this may create issues in terms of ingathering the assets and this may need to involve the courts in the jurisdiction where the crypto is located. Solicitors might therefore want to make it clear in their letters of engagements and other communications that they will not be responsible for advising on any area relating to foreign rights or assets, and recommend that the client obtains specialist advice from the relevant jurisdiction for this part of the work.

Even with third-party assistance, the work involved in ingathering overseas crypto might extend the timescales for winding up the estate and it is up to the solicitor to manage the expectations of their clients in this regard.

2) Practical aspects

It may be necessary for the client to obtain advice from technologists and other experts when dealing with the crypto – for example, to make sure that the security of estate assets is not compromised.

Again, it is sensible for a firm to advise that it is not responsible for advising on the practical aspects of storage, valuation, sale or conversion of crypto assets, and that the client will need to obtain specialist advice and support from an external (digital) expert for these matters.

3) Fluctuating valuations

There are risks to an estate from the potential volatility of crypto assets. In particular, the volatility could cause problems if there is a difference between the valuation at the date of death and at the final sale, and it is important that the solicitor highlights these risks to the client, explaining the potential effect of asset volatility.

Consider the wording of your letter of engagement. If it does not already contain a warning that the value of assets within an estate can fluctuate during the executry process, make sure this is added. It is also advisable to include wording that clearly highlights the volatility of digital assets and the implications that this might have in terms of both valuations and tax in the administration of an estate.

4) Timescales

In these cases, it is important to act quickly and, where delays are outwith your control, make sure you are making every effort to move things on, while communicating with your client and keeping good records. If the deceased’s estate includes crypto, but it has not been left as a specific legacy, the executor may need to decide whether it should be passed on in its current form or sold with the proceeds and then passed on (in the same way that, for example, an executor may have to make decisions about shares held in an estate). Given the volatile nature of crypto, the executor may need to act quickly to establish the best course of action.

As with all executry matters, it is important that solicitors manage the expectations of their clients in terms of timescales, communicating effectively about potential timescale concerns and outlining any external, uncontrollable factors that might cause delays.

Crypto top tips

In summary, the key takeaways to bear in mind are:

•  Maintain your risk-based approach.
• Adhere strictly to LSAG and the Law Society when it comes to AML and client/transaction due diligence.
• Think about whether you have the knowledge, skills and capacity to deal with estates involving crypto where it is potentially complex.
• Think about investing in relevant training to ensure you can do this work in the future.
• Consider jurisdiction and practical issues relating to the crypto part of the estate and be clear with the client about what you will not be responsible for.
• Be mindful of how quickly the value of crypto can fluctuate and make sure clients are aware of this too.
• Communicate with the client clearly on timescales and the potential impact of delays.

Keeping these points in mind should help when navigating the brave new world of cryptocurrency.

This is an article provided by Lockton, the official insurance broker responsible for placing and administer the Master Policy of the Law Society of Scotland. Lockton is the direct point of contact for anything related to the Master Policy, including claims, practice changes and general enquiries.