Digital assets – from cryptocurrency and non-fungible tokens (NFTs), to stablecoins, central bank digital currencies (CBDCs), and more – is a rapidly evolving field. Once a niche interest, around 12% of UK adults now own some form of digital assets – equivalent to 7 million people. According to Financial Conduct Authority (opens a new window) research, consumers increasingly view these assets as part of their wider investment portfolio.
For law firms and solicitors working in wills and probate, it is becoming increasingly common to see estates that include some form of digital assets. But with this comes new forms of risk – which practitioners can no longer afford to overlook:
AML, source of funds, and source of wealth
Digital assets, including cryptocurrency, are generally subject to anti-money laundering regulations and the Proceeds of Crime Act 2002. As with any client matter, it is therefore important to take a risk-based approach and carefully consider and document decisions on source of funds and wealth.
Digital assets can be a legitimate form of wealth that can be accumulated, traded with, and converted to a standard currency to purchase other assets. Digital asset 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, like traditional assets, digital assets carry risk – including potential use for illegal activities, such as money laundering. For now, they can also afford holders a greater level of anonymity, which can complicate identification checks. These factors require additional scrutiny, and must be considered during initial risk assessments.
Solicitors should refer to the guidance (opens a new window) from the Legal Sector Affinity Group (LSAG), which is made up of all UK AML regulators.
Enhanced due diligence
Practices should strongly consider enhanced due diligence measures when any sources of funds or wealth are derived from, or via, digital assets. They should also consider whether it is within the firm’s risk appetite, or whether lawyers and support staff would benefit from training to bring the work within risk appetite in the future. Practices must also think about whether they have the capacity to deal with such work, or whether they should decline the instruction.
Where the assets held by a client have a complex transactional history, a blockchain analysis company can provide a specialist report tracing past transactions and the ultimate source of the funds. It might be prudent to ask your client to provide such a report, or to authorise you to instruct one.
Will drafting
When instructed to prepare a will for a client, a potential problem for executors and representatives is accessing digital assets after the testator has died. There have already been publicised accounts of situations in which beneficiaries have been unable to access highly valuable assets, because no-one had access to the deceased’s private keys or passcodes.
Ideally, your client should nominate an executor who has the technical knowledge to understand and access the assets. The will should also include a specific provision about how digital assets, including cryptocurrencies, should be managed. You should also check whether the platform on which such assets are held allows the testator to assign a legacy contact.
Security concerns
It may be necessary for the client to obtain advice from experts when dealing with their digital assets, to ensure that the security of estate assets is not compromised.
Again, it is sensible for a firm to advise that they are not responsible for advising on the practical aspects of storage, valuation, sale or conversion of digital assets, and that the client will need to obtain specialist advice and support from an external (digital) expert for these matters.
Fluctuating valuations
There are risks to an estate from the potential volatility of digital assets. This volatility could lead to a difference between the valuation at the date of death, and during the final sale. 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 exist, include a warning that the value of assets within an estate can fluctuate during probate. 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.
Timescales
If the deceased’s estate includes digital assets, but 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 such assets, the executor may need to act quickly to establish the best course of action.
As with all probate matters, it’s important that solicitors manage the expectations of their clients in terms of timescales, communicating effectively and outlining factors beyond their control that might cause delay.
Key considerations for digital assets
In summary, the key takeaways to bear in mind are:
Maintain your risk-based approach.
Adhere strictly to Law Society guidance when it comes to AML and client/transaction due diligence.
Consider whether you have the knowledge, skills, and capacity to deal with estates involving digital assets where it is potentially complex.
Invest in relevant training to ensure you can do this work in the future.
Consider jurisdictional and practical issues relating to any digital assets, be clear with the client about where you will, and will not, take responsibility.
Be mindful of how quickly the value of digital assets can fluctuate, and make sure clients are aware and informed.
Communicate with the client clearly on timescales and on the potential impact of delays.
Keeping these points in mind should help to ensure that digital assets are managed with the same rigour as any other part of the estate.
For more information, reach out to a member of our team.
Visit our Solicitors (opens a new window) and LEAP (opens a new window) pages for additional insights.
