Facilitating freedom for digital asset owners

17 Apr 2023

It’s no secret that the rapid evolution of the digital asset market has left governments and regulators struggling to keep up. With high-profile cases such as the collapse of FTX – which saw investors left empty handed – regulators are under a lot of pressure to offer some security to investors in this emerging market.

The US Internal Revenue Service (IRS) recently appealed for public feedback on nonfungible tokens (NFTs), seeking to establish whether investors viewed them as “collectable” assets. The consequence of classifying NFTs as “collectables” could see them subjected to capital gains taxes of up to 31% if they are not held in appropriate wealth structures.

This is a prime example of how the lag between purchasing a digital asset and regulations coming into effect can have significant implications, which investors may not have been prepared for. It also necessitates digital asset owners to keep abreast of regulations introduced by governments. This is a tall order, particularly for individuals with multi-jurisdictional assets, and the consequences of failing to comply can be substantial.

Whether considering tax planning, asset protection or succession planning, appropriate digital wealth structuring – by way of engaging a corporate trustee – should be on the radar of digital asset owners. However, for entrepreneurial investors who have independently amassed digital wealth, engaging a trustee can be met with scepticism.

It can be a daunting prospect to let a trustee take legal ownership of the digital assets and wealth that, usually, have been acquired through endless hours of research and savvy investing in a notoriously volatile market.

While, for some, it may seem counterintuitive to engage a traditional service provider for assets and wealth that sit firmly outside tradition, the benefits of applying decades of wealth structuring expertise to assets which currently have little security, should not be underestimated.

Without wealth structuring, trying to comply with constantly changing regulations, protect your digital assets, manoeuvre between the digital and traditional worlds or mitigate risks can feel like pushing a square peg through a round hole. A responsible, experienced trustee can be a valuable tool in rounding the edges of the peg.

With the current lack of regulation in the digital asset market, some service providers may shy away from onboarding clients with digital assets. To best preserve and grow digital wealth, it is important to find a trustee who can evidence their experience of working with clients with digital assets and that has a network of specialists.

A prudent trustee knows when an expert is needed to manage a specialist area. For example, a trustee should never hold – or even see – a client’s cryptocurrency key. Instead, the trustee takes responsibility for finding a reputable and experienced custodian. By undertaking rigorous due diligence on potential custodians, a trustee facilitates an investor’s time being spent on tasks they enjoy, rather than ones which can feel like an obligation.

Rather than considering relinquishing ownership of hard-earned gains to be a loss, digital asset owners are looking to trustees to relieve them of the time-consuming – and arguably ‘dull’ – side of managing digital wealth. From multi-jurisdictional tax compliance to accounting and administration, engaging a trustee allows asset owners to enjoy the benefits without the burdens.

A prudent trustee will recognise that every digital asset client, and every wealth journey, is different. From crypto-natives and blockchain founders who have built digital wealth to high-net-worth individuals looking to diversify their existing portfolios, the ability to identify individual objectives and provide tailored structuring solutions to meet those needs is invaluable.

For owners of assets that were designed “outside the box”, the challenge lies in finding a service provider who will not try to shoehorn a client’s assets and objectives into existing services but will instead build new boxes to house them.

Anyone could buy a suit “off the rack”, but engaging the services of a tailor will result in one that fits perfectly. Most people can put time and energy into cooking a delicious meal, but it will likely fall short in comparison to the dining experience offered by a Michelin star chef. When it comes to digital assets, owners may well be able to manage their assets themselves, but the ability to engage top tier client service professionals is a luxury to be enjoyed.