The 21st Century Trustee: Managing Cryptoassets
Imagine the following situation: an individual set up a trust with a corporate trustee to make sure to distribute all her assets according to her wishes and avoid probate.
The individual passes away and, unexpectedly, the trustee receives the decease’s digital devices: a mobile phone, a laptop, and a clear Access Plan together with a Digital Assets Inventory.
From a pure digital assets’ perspective, the keyholder has absolute power to transfer, sell or spend the digital assets even if legally the said keyholder does not have the right to them.
To deal with this matter, the trustee should be able to understand the network rules. For example, the trustee should know how to deal with cryptocurrency exchange accounts in case the exchange has custody of the client’s cryptocurrencies.
Also, as there is no uniform legal framework to access digital assets, the trustee should be ready to navigate national and local laws, jurisdictions, and unknown legal risks.
Moreover, the corporate trustee has to make sure that its in-house accountants understand the impact and know how to deal with these new kind of assets.
For example, if the client was a crypto miner views are mixed on how to account for the cryptocurrency received. Some see an exchange transaction that creates income whereas others see an internally generated intangible asset.
From the taxation angle, different tax authorities may take different approaches. For holders of digital assets such as tokens, the trustee will need to understand the rights and obligations of the underlying asset as well as how the asset is being used to determine whether it might be subject to tax on an income or capital basis.
In the case of the crypto miner client, the income generated from mining is likely to be subject to an income tax regime on generation.
From an internal operations perspective, if the trustees have access to the storage source for the client’s digital assets such as NFT, art, photographs or copyrights, they should have established solid internal policies and procedures to access data in these devices, the digital assets via these devices as well as online accounts and online subscription services in order to proceed according to the client’s wishes.
Last but not least, regarding cybersecurity, corporate trustees should adapt to manage and protect themselves from the massive risks increase linked to the transition into a digital era.
In addition to the leakage or hacking risk widely known, the trustee should take key internal operations risk management decisions.
In our client example, external devices are going to be connected to the internal IT network that may jeopardise the company's network. Furthermore, very likely, the trustee has to decide how to proceed with the unencrypted backup copies and the way they should be stored.
This is the 21st century trustees’ new world.
The 21st century trustees are starting to manage client relationships where physical property rights link with the digital world in a way that they may not fully understand.
Trustees are pushed to learn hastily not only about the digital assets’ technical challenges implications on estate planning without a uniform and clear legal framework but also to adapt their internal operations and security protocols to a new digital era with different and -perhaps- unknown risks.
