Bitcoin’s death problem: how billions of pounds worth of crypto assets are being lost when people die
After losing his life to complications related to Crohn’s disease in India at just 30 years of age, cryptocurrency executive Gerald Cotten risks taking tens of millions of pounds worth of Bitcoin with him to the grave.
As the chief executive of QuadrigaCX, Canada’s biggest cryptocurrency exchange, Cotten was responsible for accessing thousands of Bitcoin, a cryptocurrency worth £2,600 per coin, on the company’s “digital wallets”.
But after Cotten’s death from complications of Crohn’s, a disease of the bowels, on December 9, his family and colleagues realised that the strict security measures he had adopted to guard his cryptocurrency stash left them with no way to access the company’s coffers.
The result? Nearly $200m worth of cryptocurrency has gone missing forever, as the complex string of passwords required to gain access were solely in his hands. An encrypted laptop became the nerve centre of the company’s exchange business and the company, and its many creditors and investors, are unable to gain access to his funds.
It might sound like a one-off scenario, but this is not the first instance of someone’s death wiping out their cryptocurrency fortune.
Digital currencies like Bitcoin and Ethereum are built on the blockchain, an online database that stores records of all transactions. They are designed to be extremely hard to hack into, existing on the internet or on encrypted hard drives known as “cold storage wallets”.
Bitcoin
Bitcoin is a cryptocurrency and only exists online or in digital wallets CREDIT: BLOOMBERG
In 2013, early Bitcoin advocate Matthew Moody died when a two-seater plane he was flying in crashed in Chico, Northern California. His father, Michael Moody, has since spent years trying to reclaim his Bitcoin fortune, with each digital coin worth thousands of pounds. But his digital wallets have been locked as the passwords to release them died with him.
One of the earliest cryptocurrency wallets holds a veritable digital fortune. The wallet allegedly belonging to Bitcoin’s mysterious creator, Satoshi Nakamoto, who has not been heard of since 2011, holds around 1.1m Bitcoin.
Today, these digital coins could be worth up to £3bn. But since nobody has access to Nakamoto’s private keys, they remain impossible to access.
The death of Cotton has put a renewed spotlight on the question of inheritance of Bitcoin. If users die or lose their encryption keys for accessing their Bitcoin, how do they prevent the digital assets from being lost forever?
“Five years ago we had a similar issue,” says Erik Wilgenhof Plante, a director and head of legal at UK cryptocurrency exchange BeQuant. “A customer passed away and his next of kin asked could he somehow be given access to his Bitcoins. Of course if you do not have the private key then the Bitcoin is lost.”
There are many reasons to keep Bitcoin secure and hidden away on encrypted systems. With its soaring value last year, a few Bitcoins could be worth a small fortune when they hit $20,000 a piece in December 2017.
“There are risks of kidnapping,” Wilgenhof Plante says, “it could be quite easy to kidnap a person and in that way get access to the private keys.”
It has proved to be a real risk. In December 2017, an executive at UK-based Bitcoin exchange Exmo was kidnapped in Kiev and only released after paying a $1m ransom in cryptocurrency.
The best way to guard against the loss of your digital fortune after your death is to use a “multisignature” key.
A multisignature key means that several different portions of the private key which guards the cryptocurrency must be assembled in order to reveal the final code to release the currency.
A single key is useless, but the presence of every one, or the majority of keys, could unlock the digital wallet.
Bitcoin and other cryptocurrency assets have plunged in value since a rally in 2017
Bitcoin and other cryptocurrency assets have plunged in value since a rally in 2017 CREDIT: GETTY
Other options available to cryptocurrency pioneers include a “dead man’s switch” system which requires the customer to regularly check in to prove they’re still alive. If they stop triggering the system, then their virtual assets are transferred to colleagues or their family.
And, as inevitable as death, there are taxes.
“HMRC found cryptocurrency is property for inheritance tax purposes,” says Natasha Stourton, a trusts expert at the law firm Withers. “That brings up various issues of valuation, and even finding the cryptocurrency.”
Of course, some might use the very nature of cryptocurrencies – that they are anonymous and hard to trace – to keep them out of sight from the taxman.
Iqbal Gandham, the UK managing director of trading platform eToro, which offers a cryptocurrency product, said that the problem of transferring assets after death isn’t just a problem found in cryptocurrency pioneers.
“Somebody out there needs to know how much you own and who you want to give it to,” he says, “you just need to include crypto into that jigsaw puzzle with a lawyer.”
But if Bitcoin investors don’t pass on details of their holdings to their lawyers, then their businesses can be left with a situation like Quadriga, which is still reeling from Cotten’s death.
The company’s website has been left blank except for a message informing customers that the company has filed an application for creditor protection in Canada’s Nova Scotia Supreme Court to address “significant financial issues”.
“For the past weeks, we have worked extensively to address our liquidity issues, which include attempting to locate and secure our very significant cryptocurrency reserves held in cold wallets,” Quadriga’s website says. “Unfortunately these efforts have not been successful.”