Why Abandoned Bitcoin Deposits Pass To State Control
One of the issues making the rounds in the bitcoin community lately is the concept of escheat, or the transfer of “abandoned” property to the state (Commonwealth countries would use the term “reversion”). Some bitcoin users have asked that wallet providers provide an option to donate your property to a certain person or organization if you disappear, while others have suggested that the bitcoin protocol incorporate an optional safety feature that automatically transfers a wallet’s contents after a set period of time has elapsed with no activity (i.e. if you forget your password or private key).
Unless you are an attorney or work in a bank, you’ve likely never heard of escheat. It works like this: say you have a couple of dollars in a bank account that you forget about. You move a couple of times, change your telephone number, stop using an old email address, etc. The bank that maintains the account makes a good faith effort to get in touch with you, but can’t. After a certain period of time without hearing from you, generally three to five years (statutes vary by jurisdiction), the bank closes your account and sends a check to the state, along with your last known contact information. The state, in turn, becomes the trustee, holding your property for you until you show up to claim it.
Nearly all forms of durable property are subject to escheat, but the most common asset turned over is cash in the form of utility deposit refunds, uncashed stock dividend checks and so forth. The Great State of Texas (where I work), holds more than $3 billion in unclaimed property and maintains a searchable database online. A brief search on the day that I wrote this article showed that most of the amounts held by the state were less than $100. Tangible personal property, such as jewelry or other valuables pulled out of forgotten safe deposit boxes, is typically sold at auction after a further waiting period.
Escheat prevents trustees from unjustly taking property by “losing contact” with beneficiaries and also gives them the opportunity to clear their books of dead assets (banks usually use the term “dormant”). Dormant bank accounts are an especially tempting target for unscrupulous bank employees, since the owner is unlikely to detect misappropriation of forgotten funds.
Bitcoin trading platforms, wallet providers and others that hold funds on behalf of customers are, legally speaking, trustees. Trustees have a fiduciary, and in many cases a contractual or statutory duty, to safeguard the assets of a principle in the best way that they can. If a principle cannot be contacted and has left no instructions, the absence of a procedure to disclaim assets in trust would place a trustee in the unenviable position of having to keep up with a valuable asset forever. What if the principle died but left an heir who comes looking for his inheritance many years later? What if the trustee ceases operation, retires or goes bankrupt?
As the number of people keeping substantial amounts of savings in bitcoin grows over time, so too will the amount of bitcoins held by third party services that are subject to escheat. How can you prevent the state from taking charge of your secret bitcoin hoard? The best solution is to keep up with it yourself, on your own computer or in cold storage in the mattress. Bitcoin addresses are protected by encryption that is, for all practical purposes, unbreakable. This means that bitcoins in cold storage cannot be stolen, seized, frozen or otherwise molested in any currently conceivable way. Of course, this also means that you also assume all liability for your losses due to fire, flood, a “tragic boating accident,” or your own bad memory.
If you must entrust your riches to a wallet service or keep them in a safe deposit box, make sure that you update your contact information as necessary. In the case of a safe deposit box, keep up with your box rent payments each year. Many people own safe deposit boxes that they hardly ever visit, so the bank is unlikely to close a box that is current for the sole reason that you haven’t opened it in a while (your lease agreement should outline the conditions under which the bank will close your box). Some banks allow safe deposit box lessees to prepay box rent for many years in advance (think Credit Suisse, not Wells Fargo), guaranteeing the safety of your bitcoins for an extended period of time.
There probably aren’t any reputable wallet services old enough to be subject to escheat just yet, but there will be soon. If you suddenly remember that you have forgotten bitcoin deposits somewhere a few years from now and can’t get in touch with the company, your first step should be to contact the abandoned property office in the state where the company that held them is (or was) located. If the company is in compliance with the “know your customer” rules, then you should be able to prove that funds held in trust are yours. This is a good example of situation when bitcoin users can benefit from the existing regulatory framework.
The proposed New York rules have shown that regulators are trying to fit bitcoin services into the same framework as banks. Third party services provide some great features in terms of functionality and convenience. However, the best thing about bitcoin is that it empowers you to be your own bank. If you are worried about regulation, “the banksters,” or the state, then there is no asset out there that is easier for you to personally maintain and secure than bitcoin. Our virtual and cryptocurrency consulting services can help, contact us today.
