In a recently published report, the Law Commission confirmed the now well-established common law position that digital assets are treated as “property” under the law of England and Wales. Cryptoassets are therefore capable of being the subject of a trust and are becoming increasingly popular investments. However, the collapse of notable cryptocurrencies and cryptocurrency exchange platforms in recent months such as Terra Luna and FTX has also signalled the high-risk profile of such investments.
Trustees should be aware of the fiduciary risks involved in dealing with such a volatile and speculative asset class. We spoke to Senior Trust Manager, Nicky Kendall and Rory Jones of Saffery Trust Guernsey, who also shared some tips from their practical experience of managing trusts holding crypto.
This article provides guidance for trustees who are dealing with cryptoassets to ensure that they discharge their fiduciary duties and protect themselves against risk.
1. Due diligence
If a cryptoasset was not purchased by the trustee initially, due diligence must be undertaken to verify the source of funds and wealth before accepting it into the trust fund. This information is traceable as it is stored on blockchain which provides an audit trail that may be reviewed by experts. In many cases, however, the settlor should have records of their cryptoassets and so can provide evidence of the source of wealth and funds.
Nicky emphasised that the administration of cryptocurrency is extremely complex and continually evolving. Regardless of the size of the holding, trustees must never underestimate the need to understand the assets, terminology and requirements to manage them.
2. Investing in cryptoassets
Section 3 of the Trustee Act 2000 confers a wide power of investment on trustees, though this may be restricted or excluded by the trust instrument. Trustees should therefore review the trust deed in the first instance to determine whether their power to invest is subject to any limitations.
Careful attention should be paid to the drafting of the power. Where trustees are given the power to make such investments as they think fit, investing in cryptoassets is likely to fall within the scope of this power. However, a power to invest in such securities as they think fit would not include cryptoassets as they are not currently recognised as securities under the law of England and Wales.
Where trustees are satisfied that they have the requisite power to invest in cryptoassets under the trust deed, they are still subject to a fiduciary duty to exercise care and skill when making investment decisions. The standard of care expected of professional trustees is likely to be higher than that of lay trustees.
3. Taking advice
Trustees are also obliged to obtain and consider proper advice when exercising their power to invest by section 5 of the Trustee Act 2000. As many trustees are unlikely to have prior experience with cryptoassets, it is especially important that they seek specialist advice before making such investments. After obtaining advice, trustees must then consider whether the proposed investment is suitable for the trust and whether it is compatible with their duty to diversify investments. To a large extent this will depend on the specific circumstances of the trust and the needs of its beneficiaries.
Rory explained that while a trustee can be guided by specialist advisors – including custodians and exchanges – they maintain ultimate fiduciary responsibility. Trustees must be sufficiently competent in all technical and regulatory matters regarding the digital asset space, keep abreast of industry updates, and be able to ask the right questions. This will be an ongoing learning process for any trustee, as the asset class continues to evolve.
4. Trustee protection
It is advisable for trustees to ensure that the trust instrument contains provisions which limit trustee liability for any losses arising from investing in cryptoassets. For example, where the trust owns an underlying company which holds cryptoassets, an Anti-Bartlett clause could help limit the trustees’ liability for the day-to-day management of the assets in the company and so could mitigate the risk to the trustee if the company makes poor investment decisions.
Indemnity clauses should also be carefully drafted and specifically refer to cryptoassets.
Provided that the trust instrument allows the trustees to delegate their powers, trustees may wish to delegate the investment and management of cryptoassets to an independent advisor with the appropriate specialism. This could be the settlor, if, for example, the settlor is an experienced cryptocurrency trader. It is common for the trust instrument to include settlor reserved powers of management and investment in such circumstances.
5. Practical considerations
When settling cryptoassets on trust, it is important to guard against risks of cybertheft and fraud by ensuring that the settlor transfers the cryptoassets to a new wallet or private key with the appropriate security. If the private key is lost, there is no other way to access cryptocurrency.
Trustees may wish to consider holding cryptoassets via an independent professional custodian with the correct experience in holding cryptocurrency and safeguarding private keys. Using services offered by well-recognised financial service providers and banks is usually the recommended option for professional trustees.
Nicky explained that while investing in cryptocurrency – or “on ramping” – has become easier and easier, trustees must be aware of the significant obstacles faced by clients looking to off-ramp their digital wealth back into traditional markets and systems. It is important to remember that there is a great deal of scepticism on both sides of the coin; cryptocurrencies were built on a lack of trust in traditional banking, and banks remain hesitant to take on the perceived risks associated with digital wealth. Trustees must consider this fully, and ensure they have intermediaries, including banks, who are willing to support the off-ramping process for their clients to ultimately ensure an appropriate exit strategy is in place, should it be needed.
For non-UK domiciled clients, holding digital assets in an excluded property trust, often with use of an underlying non-UK company, can offer tax advantages. While an individual is UK resident, HMRC will treat their beneficially owned cryptoassets as located in the UK for tax purposes. This means inheritance tax will be due on their crypto on death. However, if the cryptoassets are settled on an excluded property trust (ie a non-UK trust settled by a non-UK domiciled individual), it will no longer form part of the settlor’s estate for inheritance tax purposes. From a succession planning perspective, a trust can also be a good option to ensure safeguarding of crypto for future generations.
Given the continued increase in demand for cryptoassets but the associated risks, it is important that trustees are aware of the fiduciary responsibility involved in managing and investing in cryptoassets and seek professional legal advice in order to ensure protection against such risks.
If you require further information about anything covered in this briefing note, please contact Caroline Vollers or your usual contact at the firm on +44 (0)20 3375 7000.
Thank you to Nicky and Rory for their contribution. For more information about Saffery Trust’s digital wealth structing for private clients, contact their Digital Asset Team.
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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2023