04.20.2020

The Stupidity of Cryptocurrency Smart Contracts

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The decentralized, peer-to-peer digital currency known as Bitcoin is over 10 years old. Competing cryptocurrencies like Bitcoin Cash, Etherium, Ripple, Litecoin, and countless others each offer unique features and seek to become the most popular.

There are many innovative products and services that have been created to serve cryptocurrency users. Many are quite useful. Some are silly. For many, one in particular can be extremely dangerous to use when ignorant of the consequences. 

“Smart contracts” are self-executing contracts with the terms of an arrangement or agreement that have been directly written into lines of code. For example, “if Team A beats Team B by 3 or more points, then Tim owes Bob 1 Bitcoin.”

Smart contracts are not theoretical. There are many sites and services that help cryptocurrency users create and execute their own smart contracts. They do work. They can even be beneficial. 

But smart contracts can create more problems than benefits. 

Much of the excitement about smart contracts stemmed from libertarian ideals like enhancing an individual’s power and control over their property without reliance on lawyers, accountants, advisors, banks, and financial institutions. 

Perfectly laudable goals. 

Many early adopters of cryptocurrencies have become fantastically wealthy. Many others have invested a meaningful portion of their wealth in cryptocurrencies. 

Thanks to smart contracts, anyone with a few hundred bucks-worth of cryptocurrency could try to create their own estate plan. 

But the IRS, US government, and state governments do not care about your ideals and preferences. Without the slightest hesitation, they’ll take what’s “theirs” even if that means throwing someone in a cage. Perhaps that’s a risk you’re willing to take… but your loved ones probably aren’t. 

Rather than leaving your heirs a nice chunk of wealth, you could be leaving them with a giant headache and unnecessarily large tax bills. 

A state could easily decide to disregard a smart contract and force cryptocurrency assets to go through probate. The assets would then be distributed by the rules of intestate succession and the deceased’s heirs would be the ones left to unwind the smart contract or face contempt of court charges for failing to do so. 

Sufficiently wealthy cryptocurrency holders could unnecessarily forfeit huge portions of their wealth through estate taxes because of their ignorance of the law and the legal options available to reduce taxes owed. Again, their heirs would be the ones dealing with tax collectors. 

These results seem rather counterproductive given the stated goals of many cryptocurrency users. 

Even when living, wealthier cryptocurrency owners could shoot themselves in the foot because of their desire to avoid professional service providers. Those with the approach of, “they’ll never find my coins” and/or “I’ll never give up my keys” to protect against unwarranted attacks, could be the ones facing contempt of court charges. 

It’s easy to posture and be defiant when you have your freedom. Maintaining that confidence when being threatened by the government is easier said than done.

Even if someone is willing to serve time behind bars in refusal to surrender their coins, they do so as a martyr. An asset protection plan or wealth structure can legally protect your coins from unwarranted confiscation. Contrary to the “be your own bank” mentality and fiercely independent motivation behind smart contracts, the best way to secure your cryptocurrency might be to surrender ownership. 

Unless you have the technical know-how, using smart contracts as a DIY approach to estate planning and asset protection is just about one of the stupidest things you can do as a cryptocurrency holder. 

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