We previously discussed hardware wallets and compared hardware wallets with hot wallets. Today, let's look at mnemonic phrases.
BIP39 randomly selects 12 words from a list of 2,048 English words, and this word string is the core key to the wallet.
Anyone who obtains the complete mnemonic phrase can restore the wallet and transfer all assets in it, without needing the device password or biometric verification.
This string of words is not only the key to accessing assets; when disputes arise, it can also give rise to a host of legal issues.
Let's first look at three scenarios: custodial holding, inheritance, and criminal misappropriation.
I. Custodial Holding
Many people, worried that they may not remember it themselves or concerned about accidents, ask friends or acquaintances to help keep the mnemonic phrase for them.
However, delivering the mnemonic phrase essentially places actual control of the assets in someone else's hands.
There is a publicly reported case in which the party wrote down the mnemonic phrase in front of an acquaintance, reading it aloud while writing; the other party memorized most of the words and, that evening, went back and painstakingly tried out the remaining words, secretly transferred the assets in the wallet, and converted them into cash.
The defendant also argued that this was a "protective takeover," but the court ultimately found it constituted theft.
The biggest problem with oral custodial arrangements is the lack of evidence.
You only orally agreed that the other party would keep it for you, with no written record. If the assets are later transferred away, and you say it was merely custody, the other party can argue that it was a gift or a debt offset.
On-chain records show only transfers; they do not record whether the mnemonic phrase was obtained by covert observation or was voluntarily provided by you.
If the other party privately obtained the mnemonic phrase by covert observation, deception or other means and transferred the assets away, this constitutes theft;
If you voluntarily gave the mnemonic phrase to the other party for safekeeping, and the other party subsequently refuses to return it or disposes of it without authorization, this most likely constitutes embezzlement.
Embezzlement is a case handled only upon complaint, requiring the victim to initiate a private prosecution before the court; public security authorities will not proactively intervene to investigate.
Do not readily give the complete mnemonic phrase to others for safekeeping. If entrustment is necessary, make a written agreement clearly stating the purpose of safekeeping, the conditions for return and the scope of prohibited operations; otherwise, after a dispute arises, many facts will only lead to wrangling.
II. Inheritance
Self-custodial wallets present a fundamental and largely insoluble practical contradiction:
Courts and notary offices may adjudicate and certify who is entitled to the estate, but none of them can help you unlock the wallet.
Bank deposits may be queried and withdrawn upon presentation of a death certificate and notarized documents; but for a self-custodial wallet, the only key to open it is the mnemonic phrase.
This gives rise to two awkward situations:
1. Giving the complete mnemonic phrase to a certain heir in advance during one's lifetime.
The original plan was for that person to take over the assets after death, but whoever obtains the mnemonic phrase can transfer all the assets away at any time, regardless of whether the decedent is still alive.
If there are multiple heirs, disputes may also arise.
2. No mnemonic phrase was retained at all.
The will clearly states who is to inherit the assets, but without the mnemonic phrase, the assets remain permanently locked on-chain and no one can access them.
Holding a legally effective judgment is of no use; the assets cannot be retrieved.
What if the mnemonic phrase is written directly into the will?
This is not recommended.
A will must be produced and archived, and may be copied or photographed; in scenarios involving multiple heirs, this can easily turn into a first-come, first-served situation.
Hua Ge's suggestions:
The will should state only the existence, general circumstances and wallet type of the assets; record only clues, not the complete mnemonic phrase.
Where the asset volume is relatively large, sharding or multi-signature arrangements may be considered to avoid a single person holding complete control.
III. Criminal misappropriation
The mnemonic phrase is not only the key to the assets; in criminal cases it is also very important evidence.
1. You retained or copied another person's mnemonic phrase.
Even if your original intention was merely to help in good faith, objectively you did possess the ability and the possibility to transfer these assets.
Once the assets are transferred out abnormally, you will directly become a primary suspect.
Paper notes, screenshots and chat records of the mnemonic phrase may all be obtained by the investigating authorities as evidence for the case file.
How the mnemonic phrase was obtained and whether the rights holder's permission was given will directly determine whether you are investigated for theft or for misappropriation.
2. The assets in the wallet are themselves proceeds of crime.
If the assets originate from telecom fraud, pyramid schemes or illegal fundraising, on-chain tracing will follow the addresses downward all the way to their source.
As long as your wallet address intersects with the funds involved in the case, you will be brought within the scope of the investigation.
If you know the funds are proceeds of crime and still help to transfer, liquidate or conceal them, you may be found to have committed the crime of assisting information network criminal activities, the crime of concealing or disguising criminal proceeds, or even money laundering.
Do not casually accept or safekeep mnemonic phrases of unknown origin or the corresponding wallet assets; the risks are far greater than you might imagine.
To summarize.
Being able to move and take assets does not mean they belong to you; this is the difference between control and ownership.
In custodial scenarios, delivering the mnemonic phrase hands over control; oral agreements are hard to set against real-world risks;
In inheritance scenarios, the law recognizes inheritance, but without the mnemonic phrase, inheritance cannot be carried into effect;
In criminal scenarios, the mnemonic phrase is not merely a key, but also evidence for determining the case.
Disclaimer: The content of this article is for general legal education purposes only and does not constitute any legal advice or legal consultation. Reading or forwarding this article does not create any lawyer-client relationship. Legal issues in individual cases are highly specific; it is recommended that you obtain professional legal advice from a practicing lawyer regarding your particular circumstances.
