Cryptocurrency Regulation and Qualified Custody
“Cryptocurrency Regulation and Qualified Custody,” that’s the subject of today’s ACTEC Trust and Estate Talk.
I’m Stacy Singer, an ACTEC Fellow from Chicago. There are a variety of regulatory issues facing trustees considering investing in cryptocurrency. To educate us more on this topic, I’m joined today by ACTEC Fellow Jim Cundiff of Chicago, and special guest Elise McGee of McDermott, Will, and Emery, Chicago. Welcome, Jim and Elise.
Thank you. So, cryptocurrency is all over the news these days. It’s attracted significant attention, so naturally, of course, federal and state regulators are reacting. We’ve seen guidance and enforcement actions and cases brought by the FTC, the CFTC, FinCEN, the OCC, state regulatory bodies. So, this is really a timely issue.
I think the real takeaway, however, is that cryptocurrency laws and regulations really affect a number of market participants. So, not just your crypto exchanges and crypto entrepreneurs who are developing tokens for example; but this also impacts customers, people that own Bitcoin, Ether, or other cryptocurrencies, financial institutions like banks and trust companies that might be considering custody cryptocurrency or serving as a trustee of a trust that holds cryptocurrency, and really registered investment advisors who have crypto portfolios or crypto funds, or are being asked by their clients to diversify into cryptocurrency.
So, on that note, Jim, I’ll turn it over to you to talk about what a qualified custodian is and why it’s important.
What is a Qualified Custodian?
Great. Thanks, Elise. Well, as Elise said, many entities or many organizations are interested in making sure that cryptocurrency is a safe and regulated method for parties making investments. One of the key regulators is the Securities Exchange Commission (SEC), and they’ve been very active in the regulation of cryptocurrency. And at the core, one of their main goals is to make sure that the accounts that hold cryptocurrency are safe and secure, that the assets exist there, and that they are held in a qualified, custodial manner.
So, all registered investment advisors and other SEC-regulated entities must hold their cryptocurrency with a qualified custodian. For most of their assets, this is very easy. They can hold the assets with a brokerage firm, or a licensed broker, or other ways in which to hold assets. Cryptocurrency, as we all know, is a very unique asset and the qualified custody of that asset is difficult from an administrative standpoint. But it’s also very difficult from the SEC’s regulatory components. And so the SEC has qualified custodian rules that says who can hold these assets. A bank is a qualified custodian, as well as certain other financial institutions, but many of these entities have been unwilling to custody crypto because of the various risks and difficulties in properly securing the asset.
I want to talk briefly about one item that we did to push this forward, because again, I’m a crypto maximalist. I think it’s a great area and I love the opportunity to help move this forward. And so, in working with a state regulated trust company, we moved forward with that and getting qualified custody status. So, in the definition of qualified custody, includes a bank or a trust company, whether or not they’re doing business on a federal basis. That assumes that a substantial portion of their business consists of receiving deposits or exercising fiduciary powers similar to those permitted by national banks.
And we pushed that forward in the state of Wyoming, and we were able to obtain the first-ever, no-action letter permitting a retail trust company to offer digital asset custody services. And Wyoming went even further, and they issued the first-ever regulatory opinion that a state regulated trust company is a qualified custodian as that applies for the Investment Advisors Act of 1940. This is really groundbreaking and really set up a method for investment in crypto, and it really brought some confidence and some regulatory certainty to that process.
We did work closely with the SEC in obtaining this information or obtaining this guidance, but there were some glitches in the road; and we did end up following up with the SEC and not stepping on any toes in this process. So, we’re very pleased with this process and the way it went forward and blazing a method for trust companies to hold qualified custody of crypto assets.
Elise, what should people be thinking about when they’re asked to invest in cryptocurrency, if you’re a trustee or other in this area?
Cryptocurrency Considerations for Trustees
Yeah, sure. So, I think the first consideration is, really what is this thing? What is this? Is this a security? Is this a commodity? What is this cryptocurrency? And if I were to serve as trustee, would I be subject to any state or federal regulatory oversight as a result of serving as trustee of this asset? For example, would I need a money transmitter license, or enhanced custody or crypto policies and procedures. In particular, with cryptocurrency anti-money laundering and their bank secrecy act procedures and consideration. So, for corporate fiduciaries out there – might need some enhanced policies and procedures around these crypto assets.
The second item I really think as a trustee, if you’re considering acting as a trustee of cryptocurrency, is really, am I qualified to act as trustee? Do I understand this asset? Can I safeguard the asset and protect it from loss? In other words, do I have, really truly have control of the keys, the public, the private keys? Can I prevent loss? So, your uncle might not be the best person to serve as trustee of a trust holding cryptocurrency. But on the flip side, a corporate fiduciary, for example, might not want the risk and the potential additional regulation associated with holding the cryptocurrency.
So, there are a number of considerations. Those are just a couple of high-level ones that trustees are thinking about as the cryptocurrency boom continues. And so, I think we’ll keep an eye on this. We’ll keep an eye, of course, to see what state regulators, what federal regulators, how they’re reacting to it. But I think on the whole, we can expect some additional guidance from a lot of different participants. And because, quite frankly, I think as a whole the industry would like some guidance and to know that the cryptocurrency is being securely custodied, securely transmitted, and so forth. So, I think with that, this concludes our podcast.
Thank you so much, Jim and Elise for that great update on cryptocurrency regulations.
ACTEC Trust and Estate Talk Podcasts on Related Topics
- Bitcoin Craze: Investment and Fiduciary Implications (4/21/2021)
- Digital Asset Management in Life and Death (12/3/2019)
- The Future is Here: Dealing with Bitcoins and Cryptocurrencies in Tax and Estate Planning (4/30/2019)
- The Ethical Hazards of Digital Assets (1/15/2019)
- The Valuation and Reporting of Cryptocurrency on Income, Gift, and Estate Tax Returns (10/30/2018)
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