Riding the Cryptowave with circumspection

30 / 06 / 2021

With El Salvador recently announcing the formal adoption of Bitcoin as legal tender and central banks around the globe experimenting with their own digital currencies, it is no longer possible to treat investments in crypto assets and distributed ledger technology as a niche for tech-savvy geeks. This is supported by our trustee clients reporting an increase in the number of requests they have been receiving from beneficiaries to consider investing in this new, high-growth potential asset class.

By the same token (pun fully intended), the refusal by the World Bank to help provide technical support for the implementation of El Salvador’s digital ambitions – citing concerns over transparency and the environmental impact of Bitcoin mining – clearly demonstrates some of the inherent risks and downsides of investing in still developing technologies. Other risks of particular relevance to trustees arise from the immense volatility and lack of liquidity of such assets, as well as the evolving regulatory framework around them (as demonstrated by China’s recent clampdown on the crypto industry).

Unlike private investments in crypto assets which are driven by the investor’s own risk appetite and time horizon, in considering such investments trustees must act with diligence and care in the interests of their beneficiaries as a whole (including those minors and unborn). This involves reconciling the wish to dip a toe by investing in an exciting new opportunity, with the trustees’ duty to act prudently by ensuring the suitability of such investments to the trust and taking into account the beneficiaries’ needs, the size, composition and liquidity of the trust fund and the need for diversification.

Whatever the decision in individual cases – to invest (assuming the trustees’ investment powers are wide enough) or not to invest in crypto assets and distributed ledger technology – it is important that trustees:

  • have established policies and protocols for dealing with and evaluating such requests;
  • understand and carry out detailed due diligence (including on the environmental, social and governance (“ESG”) impact) of such investments, with the benefit of independent investment and tax advice;
  • are able to justify the suitability of proposed investments;
  • keep comprehensive minutes and records of their decision-making process; and
  • monitor and review the position on an ongoing basis.

We are in continuous dialogue with our trustee clients. This gives us unique insight into emerging trends and approaches to this new asset class which, in a trust context, attracts excitement and circumspection in equal measure; we bring this to bear when working to provide solutions to the issues our clients face.