This is a question which was directed at a colleague on a webinar hosted by Saffery Champness on the subject of trusts for crypto clients. I can understand why. Trustees and crypto assets are, on the face of it, not natural bedfellows. 

The job of a trustee is to protect and preserve the assets held in a trust for its beneficiaries, now and in the future.  This fiduciary responsibility means that many people would expect trust funds to comprise of low risk assets, to minimise undue losses from poor management which trustees could be required to justify to beneficiaries. Moreover, in most respected jurisdictions, trustee services are regulated. This means that trustees must identify the source of wealth entering a trust and ensure that it is not connected with illegal activities, which these days includes ensuring that the correct tax reporting has been done.

Digital assets in the form of crypto currencies, tokens and NTF's have to date been very volatile. For example, despite Bitcoin being a relatively mature asset in the class, the road to its recent highs of around $69,000 per BTC has been a rocky one, experiencing double digit drops on more than one occasion this year. In addition, a lack of consistent industry regulation for crypto assets creates challenges for trustees to ensure that there is a clear and documented history when onboarding clients. 

Given the higher risk inherent in crypto assets, how can we as trustees mitigate these risks and work with crypto clients? 

Client profile 

is an important factor.  As with all clients, the client profile and experience is important when considering the assets to be held in a trust. It is a misconception to think that trustees do not welcome higher risk assets. Trustees often hold more exotic assets, becoming skilled in dealing with IP, jets, yachts, horses, artwork and even livestock depending on the needs of the client. A trust Settlor with mainly crypto assets is likely to be crypto native (programmer, founder or experienced investor), have made a high portion of their wealth in that space and demonstrate a clear understanding of the nature of the assets being introduced to the structure. It should be abundantly clear that they are accustomed to the characteristics of this market. 

Research is key 

Sudden wealth gains usually raises red flags with compliance officers. However, these kinds of gains are common for crypto native high net worth clients. Understanding the history of the crypto assets being introduced to a structure is important for establishing the credibility of the asset values being presented. 

Pragmatic approach 

It can be difficult for crypto native clients to provide the standard documents dictated by today's compliance requirements.  The important point here is to ensure that the source of wealth history is clear and documented. This can be tricky if platforms where the wealth was originally stored are no longer operating. Trustees dealing with crypto clients need to be pragmatic about the type of source of wealth documentation they will accept, for example evidence in the form of screenshots, online messaging threads etc is becoming more commonplace. 

Specialist compliance tools 

are available from an increasing number of compliance companies working in crypto assets. Assets built on blockchain are immutably transparent and trackable. These tools trace the source of the crypto assets being introduced into a structure and can assess the risk level, taking into account proximity with reported illicit activities (hacking, money laundering etc). 

Regulated & specialist custodians Whilst regulation of the crypto space may be unsettled, trustees still need to adhere to their standard regulatory processes. Crypto assets entering a structure should be held with a regulated custodian. In Switzerland, we work with crypto native banks and custodians which are regulated for AML purposes, some of which hold Swiss banking licenses. Storage of cold wallets needs to be carefully managed with specialist service providers. 

Put round pegs into round holes 

A few crypto native clients wish to diversify their crypto assets into fiat, but many do not. At the risk of alienating these clients, trustees need to be comfortable with solutions that do not require significant portions of trust wealth to be kept in fiat assets. 

Lean in to learning 

Blockchain native clients are often motivated to use their technology find better more efficient ways to solve old problems, automating and digitising where possible. These clients have helped us to implement new modes of communications, encrypted document storage, approval mechanisms and more, based on blockchain technology solutions.

Establish legal and tax context 

by choosing the right specialist advisor. The fiscal context is often uncertain when it come to taxation of crypto assets. Moreover, many crypto clients have not given this a thought before experiencing vast gains. As with all clients, care needs to be taken that assets are correctly treated for tax purposes in their jurisdiction of residence before contributing them to a trust. 

Legal Indemnities 

are a standard practice across all asset classes. Trustees should ensure their indemnities are adequate to deal with crypto assets, engaging a specialist legal advisor to draft relevant trust clauses where necessary. 

Despite large amounts of press, digital and crypto assets are still fairly niche as trust holdings. An allocation to digital or crypto assets will probably not become commonplace until the market matures and regulation settles. Trustees are not strangers to exotic and new asset classes, and those who can add crypto and digital assets to their tool belt will realise new opportunities. Nevertheless, caution is advised to ensure they take sufficient action to minimise any undue risk in this relatively new and unexplored asset class.