Are trusts ready for cryptocurrency?
Cryptocurrency is typically seen as a riskier asset class. Alex Gauld, Client Services Senior Administrator at Equiom Guernsey examines the asset’s attributes and whether it’s viable to be held in a trust.
Though digital assets have only really emerged in the last decade, they are becoming increasingly important to consider as part of overall estate planning. From cloud accounts to crypto assets, the emergence of a virtual world is testing the status quo and providing a significant challenge to trust and estate practitioners globally.
Of all digital assets a trustee may consider holding in a trust, crypto assets prove the most difficult. A number of characteristics of crypto assets make them an extremely risky investment. As the general remit of the trustee is to take a conservative approach to risk, arguably trustees should not accept crypto assets to hold on trust, or only with the greatest reservation and certainly with the engagement of a specialist to assist in administering the trust assets.
The fact that cryptocurrency exchanges like Kraken and Bitfinex are unregulated means there is a much more serious risk of money laundering and regulatory issues than on a standard exchange or bank transaction. With no government involvement there is therefore no compensation scheme in the event of loss. Should trust assets in the form of Bitcoin be stolen, there is no way to recoup them, opening the trustee up to a much greater liability for failure to safeguard its assets.
Security and data protection is paramount to trustees and executors, and cryptocurrency exchanges like Bitfinex, which have been hacked multiple times, pose an immediate threat to the trust’s asset. Precautions may be taken to avoid loss, such as retaining cryptocurrency in a cold wallet, i.e. an offline device for cryptocurrency storage, but this does not guarantee no loss will occur. If coins are stolen from another customer of the same exchange, this will impact on the investment price, so the trustees will still sustain loss to its investment.
As opined by Bank of England Governor Mark Carney in a speech given to the Scottish Economics Conference on 2 March 2018, cryptocurrencies are failing because of their instability and because they are poor stores of value. Whether you agree with this statement or not, these assets are characteristically unfit to hold in a trust. However, it will certainly be interesting to see how cryptocurrencies evolve over the coming years and what benefit they provide to other financial sectors.
