State regulatory solutions for cryptocurrency
The volatility of cryptocurrency, along with headlines about everything from the loss of private “keys” to the failure of a number of cryptocurrencies, has left some investors skeptical about whether it is is a safe investment. For many investors, however, the risk is worth it. In a global pandemic, when governments embrace modern monetary theories and rely on economic stimulus programs to ease the financial burden on citizens, cryptocurrencies like Bitcoin can be an attractive haven. Finite supply and crypto security provides a hedge against social instability and inflation. Bitcoin appreciated nearly 770% in the first year of the pandemic, leaving the traditional “gold bullion” inflation hedge in its wake.
For those diversifying into cryptocurrencies – family offices, individuals, institutional investors – it’s a brave new digital world where caution and careful planning are key.
Ever since the inception of cryptocurrency, market participants have understandably been unsure of who the primary regulator is, whether it’s the Office of Comptroller of the Currency, the SEC, the Commodity Futures Trading Commission or other regulatory body, and appropriate law and industry enforcement. standards. This evolving regulatory environment surrounding cryptocurrency has created uncertainty that has left states with no choice but to come up with their own regulatory solutions.
State regulatory solutions
Many states have enacted laws that address blockchain and related technologies and have developed regulatory regimes around virtual currency. New York, for example, launched its “BitLicense” in 2015 as a means of regulating virtual currency activities and since then has issued less than 20 licenses allowing companies to engage in “virtual currency commercial activity”. . In 2019, Wyoming was the first state to approve a banking charter for a Special Purpose Depository Institution (SPDI) licensed to engage in digital asset business. A SPDI is qualified to obtain a main account with the Federal Reserve, which enables the direct clearing of payments for Federal Reserve customers and establishes a transparent and secure gateway between digital assets and national currencies. Wyoming issued SPDI charters to Kraken Bank and Avanti Bank (now Custodia Bank Inc.), institutions that request access to primary account payment systems. Wyoming is charting a course of legal infrastructure and is unapologetic in its interest in attracting and developing blockchain and related technologies.
Wyoming has further moved to expand the category of qualified custodians to include certain retail trust companies operating in Wyoming. In October 2020, the Wyoming Banking Division issued a landmark no-action letter allowing Two Ocean Trust to retain digital assets. This was the first-ever opinion from a state or federal banking regulator that a trust company is permitted to act as a “qualified custodian” for digital assets under the Advisors Act. in Investment of 1940. It was based on a decision of the Wyoming Division of Banking (the Division) that Two Ocean Trust was a bank within the meaning of the Advisers Act definition. The Division’s conclusion was based on a factual analysis, meaning that not all trust companies, based on the same analysis, would necessarily be considered qualified custodians by the Division. The Division’s finding is important for investment advisers seeking to hold assets with an authorized state-regulated institution for the purpose of satisfying the custody rule and for individual investors and family offices seeking of safety and security with respect to cryptocurrency wallets or, most importantly, for a fiduciary business to properly maintain a cryptocurrency position.
Security issues with cryptocurrency often overshadow estate planning with cryptocurrency. Investors are often reluctant to allow a family friend or other person to act as a trustee and to accept and be responsible for public and private keys representing substantial wealth. Wyoming is unique in its explicit recognition and regulation of trust companies that are specifically allowed to hold digital assets.
Plan with cryptocurrency
States are not solely focused on creating laws and regulations that impact the safe custody and transmission of cryptocurrency. The cryptocurrency explosion has also caused state regulators to enact new legislation that has implications for cryptocurrency estate planning. Therefore, when considering estate planning with cryptocurrency, it is important to select a state with crypto-friendly legislation and the required legal framework. There are many things to consider, especially if the state: (1) assesses an income tax, (2) maintains a modern trust code, (3) preserves investment flexibility through a strong directed trust, (4) respects confidentiality through a silent trust law that allows the settlor to create a trust that prohibits the trustee from disclosing the trust to certain beneficiaries, (5) allows self-established creditor protection trusts, and facilitates the establishment of associated non-constituent self-established trusts which can provide enhanced state tax planning opportunities,
(6) provides prudent investor law that can support and facilitate cryptocurrency investments, (7) provides a reliable and accessible legal system, (8) allows for a perpetual or expansive perpetuity period that facilitates wealth planning multigenerational and can enable assets to avoid transfer taxation for multiple generations, (9) recognizes ownership rights to digital assets, and (10) provides appropriate oversight of financial institutions that hold cryptocurrency. The combination of laws and regulations favorable to crypto investors can create very powerful planning tools.
*The full version of this article, Estate and custody planning for cryptocurrencyappears in the April 2022 issue of Trusts and estates.