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COMMENT: Death of cryptocurrency exchange founder highlights need for digital estate planning

Thursday, 7 February, 2019

QuadrigaCX, Canada's biggest cryptocurrency exchange, is unable to access millions of Canadian dollars in digital currency following the reported sudden death of its 30-year-old chief executive officer and co-founder Gerald Cotten. Cotten was apparently the only person who knew the passwords required to gain access to the company’s 'digital wallets'.

According to an affidavit filed with the Nova Scotia Supreme Court on 31 January 2019 by Cotten’s widow Jennifer Robertson, the exchange owes its customers roughly CAD250 million (USD190 million) in both cryptocurrency and cash. The affidavit says Quadriga kept the majority of the cryptocurrency in 'cold storage wallets', which are on encrypted hard drives located offline and used to secure cryptocurrency from hacking or theft. On Tuesday 5 February, QuadrigaCX was granted creditor protection for a period of 30 days by the Nova Scotia Supreme Court. Quadriga’s website says: 'We are exploring a number of options to settle our customer obligations'.

QuadrigaCX allows the trading of Bitcoin, Litecoin and Ethereum, which are digital currencies built on blockchains, online databases that store records of all digital currency transactions. The case has demonstrated that there is a clear need for the government to take further action and regulate cryptocurrency exchanges, in particular how exchanges store their customer’s holdings and what insurance should be in place in case things go wrong.

Louise Lewis TEP of Penningtons Manches LLP explains that in the UK, the House of Commons Treasury Committee report issued in September 2018 recommended closer regulation of crypto-assets. The Financial Conduct Authority has confirmed that currently crypto-assets are not within the scope of FCA regulation because these assets 'generally will not meet the criteria to be considered a specified investment under the Regulated Activities Order (‘RAO’), nor would they typically qualify as “funds” or “e-money” in the Payments Services Directives 2 and E-Money Regulation 2009'. The House of Commons report recommended that the RAO be extended and that the government should consider what 'activity' related to crypto-assets should be specified in the RAO. The Treasury Committee favoured this over creating a new regulatory framework, which, it said, would inevitably take much longer. The introduction of regulation, the Committee says, 'should be treated as a matter of urgency' (para 141). Given the often international nature of these assets, regulation is hard to implement and join up. The FCA says: 'Regardless of the legislation adopted into UK law, due to the international nature of crypto-assets, it will be necessary for the FCA to liaise with other regulators in order to ensure that a joined up approach to regulation is achieved.'

In the absence of regulation, STEP recommends that individuals take advice on inheritance planning for digital assets. It is crucial to allow delegates to access cryptocurrencies in order to prevent them from being lost forever when a user dies.

Leigh Sagar TEP, in his book The Digital Estate, provides estate-planning advice for those in possession of digital cryptographic tokens. He explains, 'a wallet stores the public and private keys that are necessary to receive and transfer tokens. It is connected to the distributed ledger that is needed to prove entitlement to the interest.' He goes on to say, 'It is crucial… that the personal representative should be able to discover any wallet programs on the testator’s devices and any paper or hardware wallets that have been stored. Their location should also be noted on the inventory document so that the personal representative, or his forensic expert, is able to identify and locate any software wallets on the testator’s computers after death.'

Both Leigh Sagar and Louise Lewis are members of STEP’s Digital Assets Special Interest Group, which lectures internationally and writes books and practice guides to help practitioners navigate the myriad of regulation and regulators in this area. More information on this group can be found here.