Cryptocurrency – key trust issues
A brief summary of key trust issues from our webinar on cryptocurrency
James Howells, a British IT worker, had some bitcoins on the hard drive of his computer that he mistakenly threw away in 2013. He now believes it is worth about £210 million and wants his council to let him search for it in landfill. He is willing to donate 25% (about £52 million) of the value of the bitcoins to his council to let him search for the hard drive, but they have said it is not possible due to their licensing permit. Mr Howells bought the bitcoins for almost nothing in 2009 but the hard drive ended up in a drawer after he spilled a drink on his laptop and he totally forgot about the bitcoins all together.
Mr Howells wishes he had never thrown the hard drive away!
Now people realise the value of Bitcoin and other cryptocurrencies and want to protect them, ensuring they last for the benefit of their family. This can include using trusts.
Chris Duncan of Carey Olsen was a guest speaker at one of our recent cryptocurrency webinars. He highlighted some of the risks and challenges that trustees face when an individual wants to settle cryptocurrency on a trust.
These are some of the points he made:
- one of the main challenges is a lack of knowledge around cryptocurrency;
- trustees are often concerned about custody arrangements (ie how to hold the cryptocurrency). The concerns are typically around the cryptocurrency being hacked, or trustees losing the private key. There can be ways to manage this risk, which can include using an institutional custodian, the trustees holding the private key in cold storage (in an offline device) themselves, or using a derivative product (eg holding a cryptofund through an exchange account);
- anti-money laundering legislation is another risk in terms of identifying source of wealth. Contrary to popular belief this can sometimes be easier with cryptocurrency because there is a way to track the transactions to identify where the source of wealth came from;
- a common challenge is investing in an asset (cryptocurrency) which is very volatile and can lose a lot of value very quickly. There are ways to manage this risk by tailored drafting to ensure that the trustees are not responsible for certain aspects (e.g. by reserving investment decisions to the settlor, rather than the trustees), and using an underlying holding company (where trust company individuals/companies are not the directors) to hold the cryptocurrency; and
- one way to reduce risk is to use a new trust deed (as opposed to an existing trust deed) to hold the cryptocurrency. The new trust deed can be drafted in a bespoke manner in order to reduce certain risks with holding cryptocurrency. This can include a properly drafted digital asset clause to enable the trustees to deal with all aspects of holding cryptocurrency (eg staking, and yield farming), a relevant exoneration provision, and to have other provisions around how cryptocurrency is invested (eg limiting leverage).
These are some of the points made by Chris Duncan. If you would like to hear them in more depth (or on other aspects, such as how cryptocurrency is taxed in the UK) you can view our webinar here.