Custodial Ownership vs Non-Custodial Ownership of Cryptocurrency in Estate Planning
By: Kenneth J. Falcon, Esq. and Sasha F. Unger, Esq.
In the world of cryptocurrency, there are two primary means of holding your assets—broadly, these are custodial ownership and non-custodial ownership. These two ways of storing your cryptocurrency have different implications for your estate plan.
Custodial ownership involves a third-party service or “custodian” (i.e. Coinbase, Gemini, Binance, etc.) storing and (hopefully) securing your cryptocurrency. When you access a custodial account, the interface you are using is proprietary to the custodian, rather than native to a given blockchain. There are a variety of security solutions offered by cryptocurrency custodians. Storage in a wallet connected to the internet and designed for immediate transfer or use is easier to access, trade, and spend. The downside to immediate transfer, however, is susceptibility to hacks. “Cold storage” (i.e. in a wallet not connected to the internet) provides for a more secure way of storing cryptocurrency but is harder to liquidate, and may require additional security measures to access.
Custodial services only allow you to trade coins that are “listed” on the given custodian’s exchange. Custodial accounts are also a less anonymous way of owning cryptocurrency because the custodian requires certain information from its customers to authorize accounts and hold assets.
Non-custodial ownership of cryptocurrency allows a user to have total and complete control of their wallet. The user has access to their own wallet file, private keys, and passwords. Unlike custodial wallets, there is no third party to maintain such information for you. With a non-custodial wallet, a user does get the benefit of anonymity and is able to purchase coins which may not have been listed on any given exchange. The obvious risk, however, is that if the user forgets a password or misplaces a private key, there is no backup, and there is no third-party company that can provide a password reset link. Moreover, if something happens to the user, unless there is a person (or several people) who are aware of the cryptocurrency holdings and how to access them, they may be lost forever.
Which Type of Ownership is “Better”?
There are benefits and risks to holding your cryptocurrency in both custodial and non-custodial wallets.
In making the decision, it is important to consider the administration of your affairs in the event of incapacity or death. So long as a custodian is trustworthy, the custodial option offers the simplest means of access to cryptocurrency for your heirs, executors, and other fiduciaries. With non-custodial ownership, there are significant technological and practical hurdles that your heirs and fiduciaries will have to overcome to access your cryptocurrency. Our firm has developed solutions to work around this inherent difficulty.
Falcon Rappaport & Berkman LLP is proud to serve the crypto community in its estate planning and administration needs. We work closely with our clients to develop solutions that satisfy whatever concerns or preferences they might have in ensuring that their valuable digital assets pass to their heirs.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.