We all know a simple truth: who owns the key, owns the cryptocurrency. But what if the owner of the key changes for various reasons? How to inherit crypto or divide it during divorce without breaking the law? How cryptocurrencies are seized in Ukraine?
We’ve discussed all these issues with Daniil Kravtsov, Licensed Attorney, PhD in law.
GN: Hi Daniil! We much appreciate the time you spent explaining some of the legal aspects of cryptocurrency usage. We want to discuss several issues on which there is little information on the network.
Let's start with cases where cryptocurrency is seized in cases of bankruptcy of a company or criminal prosecution of a citizen. We know that there have already been such precedents. What law regulates such actions?
DK: The level of legal regulation of virtual assets is different in every country. At the moment, more than 50 countries have established a direct or indirect ban on crypto transactions. At the same time, the number of countries that not only legalize virtual assets but impose a tax on any income received from crypto transactions, according to various estimates, has long exceeded 100! Among the industry leaders, for example, are Australia, Singapore, Lithuania, Estonia, and Japan. In these countries, virtual assets are a full-fledged product of the capital market: a means of payment, an investment object, etc. Naturally, such a legal object of civil rights can also be a measure to secure an obligation.
GN: Can you give any specific examples?
DK: We are aware of precedents for the seizure of virtual assets. It will be difficult to talk about the features of the procedures in different countries, due not only to different legislation, but also to different systems of law, but it is quite possible to give examples from different continents.
GN: Let's talk about one country. How cryptocurrencies are seized in the USA, for example?
DK: It is possible to apply a Bankruptcy Code, therefore seizing procedures depends on the type of the asset, the status of the entity that has become insolvent, and its place of registration or location. According to the Code, the debtor's property consists of "all legal or equitable interests of the debtor in property as of the commencement of the case", no matter where this property is located and whoever holds it. You should always keep in mind that the courts are supporters of a broad approach to the interpretation of the range of property interests that are part of the debtor's property. Consequently, virtual currencies held by a debtor are traditionally treated as part of that debtor's property.
Of course, due to anonymity, there are difficulties in identifying this property as belonging to the debtor. In such cases, US regulators use KYC data, operational investigative tools, declaration of assets under oath and fear of punishment, penalties in case of detection of fraud, and the testimony of witnesses and representatives of the payment infrastructure in court to establish the addresses of cryptocurrencies and find out information about wallets. Since a lot of crypto exchanges and other crypto companies are located outside the USA and law enforcement agencies do not extend their jurisdiction over them, bankruptcy proceedings are often carried out outside the United States by conducting similar foreign procedures.
This is the case of the Japanese MTGox Co Ltd, and the New Zealand Cryptopia Ltd. In almost all cases of insolvency recognition, the seizure of assets, including virtual ones, is used as an interim measure.
GN: How does it work in Ukraine?
DK: There are several examples of the arrest of virtual assets in the form of a ban on withdrawal and distribution in Ukrainian law enforcement practice. The criminal proceedings of such investigations are handled by the anti-corruption authorities of Ukraine.
Evidence of ownership of virtual assets by a specific person are applications of crypto exchanges and wallets on the mobile phone, seed phrases of crypto wallets, information aimed at cashing out a virtual asset, screenshots, etc. Even if there are arguments indicating that these virtual assets belong to another person, it can be very problematic to cancel a court ruling on the seizure.
The arrest of other virtual assets that are not cryptocurrencies is carried out according to the same scenario. Although technically it can be quite difficult to implement such decisions, the main thing that the user should remember is that the anonymity of virtual currency is not a guarantee of its safety in the event of claims from law enforcement or fiscal authorities.
GN: We don’t even know what is more terrible: declaring income under oath in an American court, or proving in a Ukrainian court that the crypto app on your phone does not mean that you own the cryptocurrency.
Let's move on to more mundane topics. How do you divide the cryptocurrency during a divorce, for example? We know that it is usually divided as part of the property, but there have been no court cases in these situations yet. Or have they already been? Do you have such information?
DK: In Ukrainian judicial practice, there are court cases on the division of jointly acquired virtual assets (cryptocurrencies). Curt denied almost all applications.
The reason for such decisions again lies in the anonymity of such assets. The court must establish the fact of the existence of such property (financial asset), which is almost impossible if you have parties with conflicting interests. Therefore, since it is possible to check the movement of crypto assets, but none of the parties can or want to provide it, the court dismisses the case.
GN: Daniil, do you already know about the cases when the heirs claimed the crypto as part of the inheritance? If not, then let's try to speculate what it might look like.
DK: Since the Law on Virtual Assets has not yet entered into force, we cannot consider them a full-fledged legal object of civil rights. However, if the disputed relations are not regulated by law, the court applies the law that regulates relations similar in content, and in the absence of such, the court proceeds from the general principles of legislation. According to these principles, cryptocurrencies and other virtual assets are hereditary and must be divided by law between heirs.
The legislation does not formally limit the notary in the possibility of registering the disposal of property in case of death in Ukraine. When making a will, the notary only records the will of the testator, without checking his authority over the property. At the stage of entering into an inheritance, the burden of proving the existence of such property falls on the heirs – it is they, and not the notary, who must provide documentary evidence of its existence.
GN: Okay, let's say that heirs know for sure on what exchange their uncle stored his bitcoins. What should they do?
DK: If we talk about the rules of inheritance of crypto wallets or accounts on exchanges, they are established by the provider of such a service under local laws.
All methods can be classified into two groups:
1. Traditional methods provided by the law: a will, special order to the service on actions in case of death of the account owner, power of attorney, affidavit, etc.;
2. Technological: systems that delay the payment until the event of death or systems that delay access to an account (not very common).
Unfortunately, I can’t give a lot of examples, because crypto service providers prefer to remain silent about the rules of conduct in such cases, limiting themselves to the general phrase that the funds on the account are frozen, and inheritance issues are resolved under applicable law.
GN: Is there any working algorithm that you know?
DK: The general algorithm for exchanges would be as follows: the heir passes the KYC procedure and provides the following documents (it should be noted that depending on the jurisdiction of the exchange, the application, information, and documents must be legalized and submitted in the English language, with notarized translation):
- Certificate of death of the owner of the account;
- Confirmation of the family relationship between the owner of the cryptocurrency and the heir (certificate of marriage, birth, or other);
- Identification document of the deceased account holder, which was used for KYC;
- Documents confirming the identity of the heir;
- A photograph of the heir with a document identifying the person;
- Official will;
- Certificate or another document on the right to inheritance indicating the email address of the account of the deceased owner of the cryptocurrency.
The crypto exchange checks the application and documents of the heir for the presence and sufficiency of confirmation of the rights to the inheritance and then makes the decision. If the submitted documents are sufficient and convincing, the cryptocurrency assets are transferred from the testator's account to the account of the heir.
Again, the key thing for success in this business is that the heirs have information about the email or phone that the testator used to open an account in the corresponding cryptocurrency platform.
GN: What about hardware wallets? It seems like a bad idea to write a seed phrase in the will!
DK: If we talk about virtual assets on the cold wallets, the methods are more understandable, but less reliable, because they involve the transfer of secure information to a third party: safe deposit box, encrypted electronic data storage, or you can transfer the access to a wallet to a notary.
Each owner of virtual assets knows that unlike an apartment or other real estate, where the owner is indicated in the register, the ownership of a crypto asset by a specific person is not a legal issue, but a factual one. The owner of the assets is the person who knows the key, the password, the seed phrase, or the login and password combination for an account on a crypto exchange. Therefore, the judicial prospects for such a case without reliable knowledge and documentary evidence of the existence of a crypto asset seem vague. The court simply lacks an understanding of the subject of the dispute, and as a result, it can’t deliver a judgment.
Another negative factor of our national judicial system is a low level of understanding of the laws of virtual assets. Because of this, the forecast is rather gloomy.
GN: Is this somehow related to the country's court is going to hear the case?
DK: The most favorable for the heirs will be a trial that takes place not in conditions of legal uncertainty but in countries with developed specialized legislation and judicial practice. These include the EU countries, the USA, and Japan.
GN: What inheritance taxes will you need to pay in Ukraine?
DK: In Ukraine, income received in the form of the value of the inherited property is generally subject to personal income tax and military tax.
The personal income tax rate varies depending on the category of the heir – a close relative / family member, socially vulnerable categories of citizens, a non-resident testator, and ranges from 0 to 18%. Military tax – 1.5%.
However, the greatest problem is the determination of the value of such hereditary property and the instability of its price. These issues have not yet been resolved in Ukrainian realities.
GN: Are there attorneys in Ukraine who are ready to take on such cases? Do these cases require any particular expertise?
DK: Frankly speaking, I wanted to consult on some issues with the current Ukrainian notaries before the interview. I lacked an understanding of the legal procedures that a notary must complete to open an inheritance case, in which virtual assets are part of the inheritance property. Unfortunately, none of them was able to tell me at least with a minimum degree of confidence about the prospects of such a task. There is no clear legislative regulation – there is no understandable and transparent law enforcement practice.
Of course, to represent the interests of the client in crypto matters, an attorney needs certain specialized knowledge. They need at least a basic understanding of the principles of blockchain technology, crypto exchanges, electronic wallets, etc.
GN: And the last question. Would you personally represent the interest of a crypto client in court?
DK: Despite the high risks of encountering misunderstandings of the issues inside the professional legal environment (notaries, judges, etc.), I would not refuse such a case. The law will enter into force soon, so it's the best time to shape Ukrainian practice!
