Inheritance of Cryptographic Assets: The Greatest Risk is 'Not Being Found' — Interview with Kei Nishimura

──How did you first become involved with cryptographic assets?

Kei Nishimura (hereafter, Nishimura): It began purely out of personal interest, not professionally. I think it was around 2017 when I first started trading cryptographic assets. At that time, I was simply using exchanges to buy and sell on my own, but shortly after I started, the Coincheck incident occurred.

Although there was compensation, I personally experienced the temporary loss of assets as a result of the incident.

This event led me to take a step back for a while, but my interest was reignited around 2021 when the NFT boom hit. It was around the time when an NFT by the artist Beeple was auctioned off for 7.5 billion yen at Christie's that it became a hot topic.

At that moment, I felt that this was not just a speculative object but also a movement involving new values in art and creativity. From a legal perspective, I realized that 'new forms of assets that the existing legal system could not fully capture' were emerging, and my professional interest grew stronger.

──As cryptographic assets are increasingly recognized as a viable investment option, various challenges in digital asset inheritance are coming to light. What is the biggest risk in inheriting digital assets?

Nishimura: The biggest risk is that the heirs may not even realize the assets exist. Unlike traditional assets (such as real estate and savings), digital assets exist in an intangible form. Many wallets are known only to the owner, and it is quite possible that many assets are inherited without being discovered.

Even if they are found, there's the issue of not knowing how to properly handle them. There's also the risk of losing assets due to mishandling.

Another significant issue is related to taxes. The market value of digital assets can fluctuate wildly, and they may be highly valued at the time of inheritance, leading to substantial inheritance taxes.

However, if the private keys or seed phrases are unknown, actual access to the assets is impossible. This gap poses a very large problem.

──There are various items recognized as having value in the digital realm, such as cryptocurrencies, NFTs, electronic money, and data stored in the cloud. How are digital assets currently positioned under Japanese civil law?

Nishimura: Actually, there is no clear legal definition or organization yet. However, depending on the type of asset, some interpretations have become somewhat established. Under Japanese civil law, ownership is recognized for "things." Data is not a "thing," so it does not fall under ownership. It is also often not considered a claim. For example, Bitcoin has no issuing body, and there is no right to demand anything from a specific party (claim).

So, what are they? One view is to consider them as a type of "property right" that holds monetary value. However, the issue cannot be resolved by abstract legal discussions alone, so practical interpretations depending on the situation are required.

On the other hand, cryptocurrencies held at exchanges are usually organized as claims against the exchange. This is treated similarly to deposits, allowing inheritance procedures to proceed relatively smoothly.

The problem lies with assets stored directly in self-custody wallets. These assets are difficult to prove ownership of and specify, significantly increasing the difficulty of handling inheritance.

──How should one prepare for the risk of the deceased's digital assets being overlooked and buried unnoticed?

Nishimura: It is very important to share some information during one's lifetime. However, sharing this information is extremely difficult. Private keys and seed phrases are information that one would not want to be known while alive.

It is necessary to let the family know of their existence while creating a mechanism that allows access only after death. For example, you could inform them of a hidden location, use multisig to distribute the keys, or physically split the phrase and entrust it to multiple people. There are also several products and services tailored for the inheritance of cryptocurrency assets, so using such services is another option. This area still has room for innovation and development, and I personally find it very interesting.

For the remaining family members (heirs), it is advisable to first consult a specialist. While securing access rights to devices (smartphones, PCs), appropriate procedures must be followed.

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──What legal and practical hurdles arise in the inheritance procedures when the deceased has assets held in foreign exchanges or wallets?

Nishimura: Assets managed through exchanges are relatively easier to handle. If you can prove that you are an heir, the procedures are similar to those of a bank. However, NFTs and cryptocurrencies in personally managed wallets require access by the individual, making prior preparation extremely important.

Additionally, extra procedures are necessary for foreign exchanges. Japanese family registers alone are not sufficient, and translations are often required. The rules vary by country and exchange, necessitating flexible and careful handling.

──Cryptocurrencies are known for their volatile prices, but at what point is their value determined?

Nishimura: It essentially happens in two stages. The calculation for modifying the legal inheritance share is based on the valuation at the "time of inheritance occurrence," while the actual division of the estate is based on the valuation at the "time of division." Due to the rapid price fluctuations of cryptocurrencies, it is practically rational to proceed with the division based on the most recent valuation possible.

Inheritance also significantly involves the "identification" of digital assets. Transactions with high anonymity or asset transfers through mixing services can make it extremely difficult to determine the owner, but legally, these assets are not left in limbo; they belong to someone. Typically, the person who manages the private keys and has access to the wallet is recognized as the owner, though this area still presents various challenges.

──There are gaps surrounding digital assets; how are these viewed?

Nishimura: The biggest issue is the difficulty of enforcement. With traditional financial assets, courts could seize deposits following a judgment. However, for on-chain assets like cryptocurrencies and stablecoins not held in exchanges, seizure is practically impossible. This means the "last resort" for enforcing legal obligations doesn't work. This poses a significant obstacle when trying to recover assets through legitimate means.

Addressing this issue in the future will be a challenge both legally and technologically. On the other hand, in the on-chain world, the use of smart contracts allows for the construction of automated enforcement mechanisms and the setting of securities that are not available in traditional finance. In the field of inheritance, mechanisms for automatic distribution triggered by specific events are conceivable.

──Please share your future outlook.

Nishimura: Personally, I am very fond of the Web3.0 worldview and hope that more new projects will emerge from Japan. In the process of supporting these, I believe the interface between general society and digital assets will continue to increase.

While not yet widespread, the increase in cryptocurrency-related businesses and users will lead to more encounters with real-life legal issues such as inheritance and prenuptial agreements. Going forward, I intend to provide legal services that not only support the business side but also cater to the real-life needs of businesses and users.

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◉Kei Nishimura

Attorney at Law, member of the Osaka Bar Association

Graduated from Doshisha University's Faculty of Law, completed the Law School at Kyoto University. After working in a law firm in Osaka, he founded tou Law Office. Currently active mainly in Osaka, Kyoto, and Tokyo, he provides legal support primarily to startups, real estate businesses, and creative industries, including those involved in Web3.0/AI. He is also actively engaged in complex dispute cases. He is a member of BAMBOO INCUBATOR, a startup support professional group, and has launched a digital legacy practice group consisting of multiple professionals.

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