Seed phrase management presents a new challenge to an old process.
As the adoption of digital assets is at an all time high — measured by wallet growth, many are grappling with a new challenge, digital asset inheritance. One of the core principles of blockchain technology, the framework which cryptocurrencies are built on, is the feature of self sovereignty. Never before was it possible for an individual to securely and easily self sovereign assets. This design has zero counterparty risk, an innovation never achieved before. There is no third party custodian, and there could never be restrictions placed on the property. This feature by default means that you are solely responsible to accessing these assets, and without proper communication, assets can be lost forever.
The seed phrase, a 12,18 or 24 mnemonic — string of words, serves as the login and password to access ones account. This seed phrase is needed to approve a transaction. There are many hardware devices available that act as an intermediary between the seed phrase and the blockchain, and is used to securely approve transactions. This layer of seed phrase security is a great improvement and allows users to securely store away the seed phrase, as the hardware wallet is used for signing transactions. The hardware device is typically encrypted and password protected. The security of the seed phrase is extremely important, and cannot be changed, unlike a password, which can be reset by following a process with the issuing institution. If one suspects their seed phrase has been compromised, they must immediately re-seed their wallet, by generating a new seed phrase and moving their assets into it. All it takes, is for one untrusted person to see the phrase once. One seed phrase can contain an infinite number of accounts (blockchain wallet addresses) for multiple blockchains, such as, Bitcoin and Ethereum (and other EVM blockchains).
As we consider the sensitivities that accompany blockchain wallets, we face a challenge of digital asset inheritance. How do we ensure our digital assets will safely be transferred to our heirs at the appropriate time. It would not be advisable to place the seed phrase in a will, as this compromises the security, assuming others may see it. Giving ones seed phrase to their heirs before passing, can also lead to unwanted or unknown outcomes. As Bitcoin, Ethereum, DeFi, and NFT’s graduate from nascent technologies, many more are beginning to face this challenge. Over time, individuals will store a majority of their assets on a blockchain with self custody. As of this writing I haven’t found a good software solution to this problem.
With traditional assets, one can rely on the court to collect a deceased person’s assets and apply intestacy laws. This factor contributes to why many with few assets and hiers draft a will or living trust. According to WASHINGTON, D.C. — Gallup’s polling finds, approximately half of americans don’t have a will. With digital assets, it is impossible for the courts to access these assets without the seed phrase. Therefore one can no longer rely on their local judicial system to transfer their assets. This will likely trend to more people creating a succession plan for their assets once they pass.
What solutions, or procedure do you have in place in the event of passing? Will a close friend or family member be able to access your digital assets? I would love to hear from you in the comments below.