Trustees’ Crypto Conundrum

Cryptoassets have been on our radars for a decade, and as trustees they require ever greater focus. These digital assets built on cryptographic techniques that promise to revolutionise the financial ecosystem through fast, anonymous exchange, initial coin offerings or access to future, not-yet-built, products or services, entice our settlor and beneficiary clients with potential stellar returns (e.g. Bitcoin up 12,000% since 2011) but pose genuine problems for professional trustees despite their availability and huge sums already invested globally.

First, we require a solid understanding of the new technologies and associated platforms, regulatory landscape, legal rights (if any), and the security issues. Second, we must ascertain the investment risk and whether this fits within our duties as trustees and broader trust investment requirements.

Whether the cryptoassets in question are exchange, security or utility tokens (as defined by the UK FCA) we need to understand the “what”. For example, is the cryptoasset even a form of property and, therefore, something a trustee can own as a trust asset? How do we ensure the asset is in safe custody?

Case law from common law jurisdictions (Singapore and Canada) have shown a general movement by the courts toward recognising cryptoassets as property in law.  In England, the recent High Court decision in (AA v Persons Unknown (2019)) confirmed the status of crypto currencies as property under English law following the previous 2019 Law Tech Delivery Panel legal guidance stating cryptoassets had all the hallmarks of legal property.

Where about crypto property rights elsewhere? Whilst legislators and regulators around the world are generally playing catchup, several jurisdictions are more advanced. For example, in 2018 Malta enacted legislation regulating blockchain technologies. Earlier this year Singapore, Liechtenstein and the Cayman Islands passed new laws addressing the regulation of cryptoassets and exchanges.  This autumn, the European Commission issued a ‘Digital Finance Package’ including legislative proposals on cryptoassets, however, this will take several years to complete.

We have all read stories of wild volatility (something I experienced when my own meagre holding of Celo Gold (CGLD), purchased while researching this article, gained 140% then collapsed one Sunday morning before I got out of bed!). At writing, the FCA has just banned the sale of cryptoasset derivatives to retail investors because of this volatility.

Equally eye-watering are the overnight losses of cryptoassets, valued in the hundreds of millions of pounds, that have vanished into a digital ether due to the loss of a private key or the death of the only person who knows its whereabouts.

How do trustees ensure the safety of these private keys (offline cold storage? multiple key holdings by trust company employees?) or assess the regulatory environment in respect of a crypto platform located in El Dorado?

The numerous questions surrounding cryptoassets point towards risk and how best for professional trustees to manage it. As trustees (onshore and offshore), we must consider:

  • the implications of the various proper laws of our trust instruments (we provide corporate trustees to trusts governed by the laws of numerous jurisdictions);
  • ‘anti-Bartlett’ protections afforded to trustees where trust-owned companies invest in cryptoassets (the principal helpfully re-affirmed by the Hong Kong Court of Appeal in Zhang Hong Li v DBS Bank (HK) Ltd and others 2019 whilst being conscious of the unusual dynamics of that trust);
  • including specific cryptoasset investment authority in the trust instrument itself;
  • trustee exemptions in the trust instrument and the use of specific indemnities;
  • investment activity achieving the trust’s purpose and adherence to modern portfolio theory.

These are just some of the considerations required of professional trustees (money laundering and other issues regarding anonymous cryptoassets are beyond the scope of this article). The growing opportunity and risk presented by cryptoassets means professional trustees need to fully understand the technical details but also the current patchwork of multi-jurisdictional regulatory issues that arise.

Settlors and beneficiaries eyeing cryptoassets will need professional trustees who are equipped with the required knowledge, skills and resources to navigate investment in the crypto space otherwise it could be a disaster for all concerned.

If you have any questions or simply want to discuss with a professional, do please email our Director & Group Legal Counsel, Alasdair Johnston, at alasdair.johnston@abacustrustgroup.com

 

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