Cryptocurrency Inheritance Hinges on Wallet Type, Not Asset Class

The process of inheriting cryptocurrency is rarely hindered by legal issues but rather due to heirs being unaware they exist or unable to access them. In Germany, the law has been clear on this matter for years, but the practical implementation remains a challenge.

The key distinction lies not between cryptocurrencies like Bitcoin and traditional assets such as shares, but rather between exchange accounts and self-custodied wallets. With an exchange account, there is a contracting party that can be contacted with proof of inheritance, whereas with a self-custodied wallet, there is no one to turn to, only a private key that may or may not be accessible.

The German Federal Court of Justice ruled in 2018 (case III ZR 183/17) that a contract for a user account with a social network passes to the heirs under section 1922 of the Civil Code. This means that digital content, including cryptocurrencies held on an exchange account, is treated similarly to analogue content.

The process of inheriting cryptocurrency from an exchange account involves reporting the death, providing proof of inheritance, undergoing an identity check on the heirs, and finally distributing the assets. However, with self-custodied wallets, there is no support desk to turn to, and access is limited to those who possess the recovery words.

To address this issue, various methods can be employed to make recovery more accessible while maintaining security. These include using a Shamir backup under SLIP-39, which splits the wallet secret into shares that require a threshold number of keys to recover; multisig wallets, where two of three keys are required for spending; and sealed envelopes with instructions on how to restore the wallet.