The last year has seen significant developments in the world of digital assets. After bursting into the mainstream in 2021, NFTs came of age, partly driven by the growing interest in commercialisation of the ‘metaverse’.
At the same time, 2022 witnessed what has been called by many a ‘crypto winter’ with a number of digital currencies plummeting in value.
Despite the turbulence, though, 2022 has also seen major institutions begin to wrap their arms around the Decentralised Finance (‘De-Fi’ vs Traditional Finance or ‘TradFi’) space. This, if nothing else, evidences that this new asset class, and its associated financial and technological underpinning, is here to stay.
In response to this emerging asset class, the global regulatory landscape is evolving fast.
An IMF paper published earlier this year¹, acknowledged that crypto assets are “no longer on the fringe” of the financial system. In July the EU became one of the first major political institutions to legislate for crypto assets with its Markets in Crypto-assets (Mica) regulation², while September saw the OECD launch a new transparency framework³ for compliance and reporting of crypto assets.
In the UK, the House of Commons recently voted in favour of amendments4 to the Financial Services and Markets Bill recognising crypto assets as regulated financial instruments, and signalling the evolution of a more crypto-friendly environment.
While smart, sensible regulation is welcome, the race to regulate around the globe is creating a complex terrain for investors trying to navigate the reconciliation of gains made in the digital world with traditional, fiat systems and laws.
With this in mind, there is a strong case for using structures to hold digital assets to enable owners to have the confidentiality, mobility and wealth protection they want, while easing the administrative and compliance burden.
The effective use of trusts can also help to insulate investors against rapidly changing global regulation and market or political volatility – delivering peace of mind in the process.
The power of trusts
Holding digital wealth and assets in a structure, such as a trust, can have significant benefits. Specialist trustees have extensive experience in administering structures containing volatile and high-risk assets and some are now coupling this approach with an in-depth understanding of digital assets and the developing framework of systems, processes, tools and advisor community which is growing around them.
Assets held in trusts provide greater surety over which regulations and laws apply, limiting exposure to global regulatory headwinds and the current patchwork of ambiguous international rules which are still being written.
This can be especially beneficial for ‘digital nomads’ and those with a globally mobile lifestyle.
There may also be wider factors that can make a trust a suitable solution for digital asset investors –concerns about confidentiality being upheld; bridging between the ‘DeFi’ and ‘TradFi’ or fiat world of banks, including for compliance purposes; planning for and meeting tax liabilities on digitally derived gains; or planning for worst-case scenarios – death, incapacitation, or loss of data control and portfolio access.
Lastly (but probably most importantly), trusts are attractive because they can remove friction for investors, leaving them free to focus on other pursuits.
Trusts around the world
In the absence of a harmonised approach to digital asset regulation, choosing to structure a ‘crypto estate’ in a well-regarded jurisdiction which understands and supports the Web3 technologies is especially important.
Several offshore jurisdictions took steps in 2022 to establish themselves as leading jurisdictions for digital assets. For instance, this year Dubai issued its Virtual Assets Law and established the Virtual Assets Regulatory Authority5 – positioning itself as the world’s first virtual assets regulator. Singapore, meanwhile, announced plans to tighten up its regulatory approach, to encourage innovation and reduce speculation.
Other jurisdictions, notably including Guernsey, Switzerland, and the Cayman Islands, have embedded themselves early as locations of choice.
Guernsey
Guernsey has long held a well-deserved reputation as a beacon of transparency and international co-operation as a leading global finance centre. It appeared on the OECD’s original ‘white list’ of those committing to adhere to internationally agreed tax standards, and the Guernsey Financial Services Commission (GFSC) provides robust oversight. A highly permissive framework for establishing trusts or foundations exists via the Trusts (Guernsey) Law 2007 and a thriving community of top-tier professional advisers has evolved over many years. Guernsey law is amenable to digital assets, including a provision that any type of property may be held in trust. The island is also a crypto trail-blazer, with the GFSC having approved the launch of Guernsey’s first cryptocurrency fund and the world’s first Tier 1 Bitcoin ETF6 this year. Its legal, fiscal and administrative systems are independent and therefore insulated from volatility or uncertainty emanating from the UK, EU or elsewhere in the world.
Switzerland
Boasting one of the most stable political and financial systems in the world, Switzerland is a signatory to the Hague Convention on the law applying to trusts and their recognition, and has recently introduced a new and specific licensing system for trustees. Its approach to blockchain adoption and innovation is progressive, for example, it passed the ‘Blockchain Act’ in 20207 and licenses various crypto banks and exchanges. Moreover, cryptocurrency is accepted as legal tender in certain circumstances, such as for tax payments in specific regions. The government is currently in the process of testing a digital currency system and ‘Crypto Valley’8 is a hotbed of innovation.
The Cayman Islands
With its stable economic and political environment, robust judicial system, sophisticated advisory ecosystem and links to the UK, the Cayman Islands is an established and highly regarded global financial centre. While its law on trusts is derived from English common law, its independence has allowed it to innovate. A prime example is the Special Trusts (Alternative Regime) Law, under which a special purpose ‘STAR’ trust can be created, providing significant flexibility to hold and manage higher risk assets. Another example is Foundation Companies, which are flexible hybrids between a trust and a company and are often used in digital assets structures. The Cayman Island’s recent adoption of the Virtual Asset Service Providers (VASP) framework9 has succeeded in making it an even more prominent location of choice for digital asset investors.
Decisions on whether to establish a structure and where to base it will vary, depending on investors’ personal and professional situations, their future plans, and the maturity of their digital portfolio, as well as being influenced by developments in the global race for regulation.
When evaluating the options, it is important to remember that not all jurisdictions are created equal – far from it. At the same time, technological advancement is so fast, and much of the regulation so reactionary, that it is difficult to know what is around the next corner.
2022 has seen significant developments, both in the digital assets market and to the global regulatory landscape. Taken together, and looking to the future, trusts are becoming an increasingly attractive option for digital asset owners.
1 IMF
2 Consilium
3 OECD
4 Publications Parliament
5 VARA
6 We are Guernsey
7 Sif
8 Crypto Valley
9 Cima
This article was first published with ThoughtLeaders4 Private Client Magazine.
