Digital assets are part of the estate planning process. As a result, knowing the different types of assets can help you plan accordingly. Like any asset type, everybody has something different. Nonetheless, here are 10 key terms to help you get started:
Bitcoin is a digital asset that uses encryption and blockchain technology to record transactions on a global distributed ledger. Created in 2008 as a peer-to-peer payment system, today it is the largest digital asset by market share, but it is not backed by any government, central bank, or physical asset.
Blockchain is a method of structuring and securing data into unchangeable blocks of transactions. Any attempt to make changes to an earlier block in the chain would change all the subsequent blocks and alert the network to the attempted change. Once a transaction is entered on the blockchain, it cannot be undone.
DeFi or decentralized finance “DeFi” broadly refers to a variety of financial products, services, activities, and arrangements supported by smart-contract technology and designed to exist without intermediaries or third parties such as banks, brokers, or clearinghouses. But the degree of decentralization across DeFi applications can differ widely. In some cases, despite claims of decentralization, operations and activities can be highly concentrated in a small group of developers or investors.
4. Digital Wallet
A Digital wallet stores a digital asset owner’s private key—needed to use or spend the digital asset—and public keys, which is how the owner is identified on the blockchain. The private key serves as a digital signature unique to you and must be carefully protected. If your private key is lost or stolen, you will not be able to access your digital assets. There are many kinds of digital wallets, which includes custodial wallets, noncustodial wallets, and hardware wallets.
5. Distributed Ledger
A distributed ledger is a record used to track money coming in and money going out, like your monthly bank statement. A distributed ledger is a public database that runs on many computers around the world. Instead of being centralized—at your bank, for example—a distributed ledger is shared and synchronized among the network participants so there is no single point of failure.
Mining is a very strange type of digital asset. Just like there are gold, silver, and copper mines, there are digital mines as well. Mining is the process of receiving a reward of newly minted digital assets and transaction fees for the work of validating transactions and adding blocks to the blockchain. Miners also maintain copies of the distributed ledger.
7. Money Service Business or MSB
A money service business or “MSB” is a nonbank company that transmits money, offers currency exchange, or that issues or redeems travelers checks or money orders. Currently, digital asset exchanges offering service to customers in the U.S. are required to register as MSBs with the Financial Crimes Enforcement Center (FinCEN) and many states. Registration as an MSB won’t protect us from fraud or other problems, but most fraud is committed by unregistered entities.
8. Non-Fungible Token or NFT
A non-fungible token or “NFT” is a one-of-a-kind digital asset. It is a proof of ownership of a unique asset that is recorded on a blockchain. No NFT is exactly like another, so they cannot be traded one-for-one like virtual currency or other types of tokens.
9. Smart Contract
Another type of digital asset is a smart contract. A computer program that is stored and runs on a blockchain. They may incorporate the elements of a binding contract or run only under certain conditions.
Stablecoins are digital assets that are designed to maintain a stable value relative to a national currency, a commodity, such as gold, or other reference assets.
Therefore, if you need help addressing digital assets as part of your estate plan, consider working with an estate attorney.
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Estate Attorney Jasper Berg