With headlines ranging from cryptocurrency volatility, the loss of private “keys” to the failure of any number of cryptocurrencies, have some investors doubting whether it is a safe investment. For many investors, however, the risk is worth the reward. In a global pandemic, when governments are embracing modern monetary principles and relying on economic stimulus programs to ease citizens’ financial burdens, cryptocurrencies like bitcoin can be an attractive haven. Limited supply and cryptographic security provide a hedge against social instability and inflation. Bitcoin appreciated by about 770% during the first year of the pandemic, bringing traditional “gold bar” inflation to the rescue.
For those diversifying into cryptocurrencies—family offices, individuals, institutional investors—this is a brave new digital world where caution and careful planning are essential.
Since the inception of cryptocurrency, market participants have been markedly uncertain about the identity of the primary regulator, whether the Office of the Comptroller of the Currency, the SEC, the Commodity Futures Trading Commission or any other regulator, and the application of appropriate laws and industry standards. . This evolving regulatory environment surrounding cryptocurrency has created uncertainty which has left states with no option but to provide their own regulatory solutions.
State Regulatory Solutions
Several states have enacted laws that address blockchain and related technologies and have developed regulatory regimes around virtual currency. For example, New York introduced its “bitlicensing” in 2015 as a way to regulate virtual currency activities and, since then, has issued less than 20 licenses allowing companies to engage in “virtual currency trading activity”. Meets. In 2019, Wyoming was the first state to ratify a banking charter for a Special Purpose Depository Institution (SPDI), which was allowed to engage in digital asset activities. An SPDI is eligible to obtain a master account with the Federal Reserve, an account that allows direct clearing of payments for clients in the Federal Reserve and establishes a seamless and secure gateway between digital assets and national currencies. Wyoming has issued SPDI charters to Kraken Bank and Avanti Bank (now Custodia Bank Inc.), which institutions are applying for access to the Master Account payment system. Wyoming is igniting a legal infrastructure pathway and remains adamant in its interest in attracting and developing blockchain and related technologies.
Wyoming further worked to expand the class of eligible custodians to include certain retail trust companies operating in Wyoming. In October 2020, the Wyoming Banking Division published a landmark no-action letter allowing Two Ocean Trust to preserve digital assets. This was the first opinion by a state or federal banking regulator that a trust company is allowed to act as a “qualified custodian” for digital assets under the Investment Advisors Act of 1940. This was based on a determination by the Wyoming Division. Banking (Division) that the Two Ocean Trust was a bank within the definition of the Advisory Act. The Division’s conclusion was based on a fact-depth analysis, meaning that not all trust companies under the same analysis would be considered qualified custodians by the Division. The division’s conclusion is important for investment advisors who wish to hold custody of assets with a state-regulated institution authorized to meet custody rules and for individual investors and family offices seeking safety and security in relation to cryptocurrency portfolios. are in or importantly, the trustees to properly maintain the cryptocurrency status for the corporate.
Cryptocurrency security issues often affect estate planning with cryptocurrency. Investors are often unwilling to allow a family friend or other person to act as trustee and be accepted and responsible for public and private keys representing substantial funds. Wyoming is unique in its explicit recognition and regulation of trust companies that are specifically authorized to maintain digital assets.
planning with cryptocurrency
States are not just focused on creating laws and regulations affecting the safe custody and transmission of cryptocurrencies. The cryptocurrency explosion has prompted state regulators to enact new laws that have asset-planning implications for cryptocurrencies. Therefore, when considering estate planning with cryptocurrency, it is important to choose a state with crypto-supporting legislation and the necessary legal framework. Several items should be considered, including: (1) the state assesses an income tax, (2) maintains a modern trust code, (3) maintains investment flexibility through a strong directed trust statute. , (4) respects confidentiality through a silent trust statute that allows the settlor to create a trust that prevents the trustee from disclosing the trust to certain beneficiaries, (5) self-settling creditor protection trusts Authorizes and facilitates the establishment of respective non-grant self-settled trusts that can provide advanced state income tax planning opportunities,
(6) provide for a governing Prudential Investor Act that may support and facilitate cryptocurrency investments, (7) provide for a reliable and accessible court system, (8) authorize a perpetual or extended perpetual period that Facilitates multi-generational wealth planning and can allow asset transfers to avoid taxation for multiple generations, (9) recognize digital assets property rights, and (10) provide proper monitoring of financial institutions who hold cryptocurrencies in custody. The combination of crypto-investor-friendly laws and regulations can create a very powerful planning tool.
,Full version of this article, Estate and Custody Planning for CryptocurrencyAppears in the April 2022 issue of Trust and Estate.