E216 Bitcoin’s Unclaimed Property Problem
Bitcoin is getting more mainstream every day. But new bitcoiners need to be aware of the unclaimed funds problem. Hopefully we can contribute to a solution.
How do Unclaimed Funds Work, Generally?
The first level of prevention of loss is password recovery. This is not part of unclaimed funds, but for banks and other custodians.
If your bank account is dormant (meaning no activity for a long time), then the bank must make attempts to contact you. If there’s no contact after several attempts, then the bank sends your money to the State to hold in the unclaimed funds department. You and your heirs can recover from the State any time.
This is how banks protect their members from catastrophic loss of assets.
Why Bitcoin Is Different
When you own your bitcoin, you own your own keys (self-custody). If you keep your bitcoin on an exchange, there are some similarities to a regular bank account. Meaning, you have a way to recover your password and there is a similar unclaimed funds procedure as discussed above.
If you are a real bitcoin enthusiast, you probably own your bitcoin. In this case, there is no one you can call to recover your password. You are responsible for it, and there are some measures you need to take to make it work.
If your bitcoin wallet is dormant for years, no one will attempt to contact you. It just stays in zombie mode. Bitcoin is a public ledger, meaning we can all see how much is in a given wallet, we just don’t know whose wallet it is. There are wallets sitting with huge amounts and there is no one to check on them.
If you lose your keys (or fail to deliver them to your heirs), they are gone “forever”. In other words, your wallet becomes stuck with no way to get into it.
How to Prevent Lost Bitcoins
Since bitcoin is not governed by the unclaimed loss protocols, there is not a safety net.
If you think someone knows how to manage your crypto after your death, it won’t happen without leaving instructions.
How do you recover your password?
Don’t share your keys. You can split up your seed phrase or add a passphrase. You can give a copy of the hardware wallet to one person and the PIN to another person.
Another option is a decentralized dead man’s switch. A dead man’s switch is a button that needs to be pressed in order to prevent something from happening. The act of pressing the button is proof that you are alive. If you fail to press the button as scheduled, then the process starts for your funds to transfer to your beneficiary. For example, the PINs, phrases, or locations of those keys will be sent to people who will combine the information to access your account.
It’s important to remember that it is not safe to store seed phrases anywhere online (even split up).
A centralized dead man’s switch with a company could go away at any given time. A decentralized dead man’s switch would be some sort of open-source project that does not rely on one server or one company. A solution that preserves the ability to control your assets is decentralized and secure. For now, split hardware/pin or seed/passphrase are the best solutions we have.
What are some better solutions? I would love to hear from you.
What will bitcoin look like in the future? Will we have bitcoin “banks” to protect your money and provide quick easy access? How will they remain decentralized and let you keep your sovereignty over your money?
If you want to learn more about probate in general, please check out my book, “How Probate Works.” I don’t have a Bitcoin chapter yet, but you will get a sense of how the probate process applies to your Bitcoin situation.
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