Effect of Digital Assets on Trust Industry
Bermuda has always been regarded as a jurisdiction with a formidable reputation as one of the premier offshore jurisdictions in which to develop various forms of legal structures, such as trusts, insurance, reinsurance and investment fund structures. The jurisdiction has well-regulated and established legal, advisory and financial service industries, supported by a sophisticated, independent and stable legal and judicial system. When new and innovative ideas are introduced with the purpose of stimulating the economy, legislators are tasked with introducing legislation to provide legal certainty without inhibiting innovation to ensure the sector is embraced by the existing community. This was evident when Bermuda introduced both the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 and the Digital Asset Business Act 2018 (DABA), both accompanied by corresponding regulations to assist the jurisdiction become a global leader in the digital asset space. To that end, it goes without saying that many trust professionals in Bermuda have had to consider what impact, if any, the holding of digital assets will have on the local trust industry.
New Asset Class
With digital assets being a new asset class that’s garnered much attention, it’s not surprising that trustees are being asked to consider acquiring ownership of these new forms of assets. Wealthy and financially sophisticated clients are exploring how they can either transfer digital assets into a trust as a form of asset protection, among other purposes, or are asking trustees to invest in digital assets on behalf of the trust. Trusts are also being considered as part of the fundamental structuring behind the digital asset projects and platforms. Institutional and individual trustees are therefore being encouraged to familiarize themselves with how digital assets function, how they’re acquired, how they must be managed and how they can be distributed to beneficiaries of a trust, to name a few. Additionally, trustees are mindful that they must ensure continued compliance with all of the legislative and regulatory requirements imposed upon trustees, included as a result of the oversight of the Bermuda Monetary Authority (BMA).
Some have queried whether it’s possible for a trustee to hold digital assets as a part of the trust’s assets. “Trust property” has generally been described as any type of property that’s “real or personal” and capable of being ascertained, such as cash, land, securities and interests in property, including interests under other trusts. However, trustees have had to grapple with how digital assets can form trust property based on the understanding that many digital assets are designed to work as a store or medium of exchange of value through the use of cryptography to secure financial transactions, control the creation of additional units and verify the transfer of assets. Be that as it may, some experts in the field of technology and trust law are of the view that if the asset is identifiable and has the ability to be transferred, a trustee does have the power to hold digital assets. In spite of the understanding of what digital assets are, the key question is what constitutes “property.” The simple definition is “something of value, either tangible, such as land, or intangible, such as patents, copyrights, etc.” Therefore, it is logical to conclude that digital assets, although intangible, do possess the characteristics to form trust property capable of being held by a trustee, as those who own such assets have the right to possess them, use them and dispose of them as they deem fit, similar to the way in which intellectual property is dealt with. To suggest that digital assets are incapable of being classified as trust property could have a detrimental effect on how other forms of intangible assets are held by trustees, such as trademarks, patents or copyrights. For example, to propose that digital assets aren’t property and/or are incapable of being held by trustees could arguably suggest that the holding of other forms of assets isn’t possible and requires special powers of the trustee to hold them. This of course, would make it extremely problematic for trustees to demonstrate that they’re capable of holding such assets. On that account, it’s reasonable to conclude that digital assets can be constituted as trust property and held by trustees on the terms of a trust.
Notwithstanding the position that digital assets are property capable of being held by trustees, it may be prudent to include bespoke provisions in a trust document to confirm this. Trustees may also wish to give some thought as to whether it would be useful to include special powers within the trust document to address the management and safekeeping of such assets, while the concept of digital assets advances. Investors and/or regulators may wish to be reassured that the trustee has adequate powers to effectively manage the digital assets, while also ensuring that there are acceptable custody arrangements in place to protect the investors from any undue misfortune. It isn’t unusual for trust documents to include special provisions that provide for the assets and liabilities of certain assets to be segregated from other assets of the trust, as a form of comfort to its investors. Bermuda’s trust law already allows for the appointment of a managing trustee, and trustees may wish to include specific provisions whereby the management of the digital assets is exercised solely at the discretion of the managing trustee to mitigate the nonmanaging trustee’s liability. The Bermuda Trustee Act 1975 provides that: “A trust instrument may contain provisions by virtue of which the exercise of any of the trustees’ powers may be reserved to a managing trustee, and no other trustee is liable for any of the decisions, acts or transactions of the managing trustee in so far as they amount to exercise of powers reserved by the trust instrument to the managing trustee. This may also be recognized as a form of comfort to regulators, as the trustees should be able to demonstrate that the managing trustee has the requisite capabilities to deal with such assets. Additionally, trustees will be required to provide their investors and regulators with guarantees that they have adequate procedures in place to ensure the security and storage of the private keys or codes that are required to control or access the digital assets to evidence the effective exercise of their fiduciary duties as trustees.
It remains to be seen whether the BMA will impose any additional requirements for licensed and regulated trust companies to abide by with respect to this new form of asset holding, especially in cases in which the trust company itself isn’t performing any form of digital asset business pursuant to the DABA but is simply holding the digital asset as an asset of the trust. Trustees will need to be mindful of all of the regulatory and tax implications surrounding digital assets, taking into consideration the fundamental principle stated in Speight v Gaunt that “…[As] a general rule a trustee sufficiently discharges his duty if he takes in managing trust affairs all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own.” Therefore, it’s vitally important for trustees to thoroughly scrutinize any digital assets that they wish to invest in or hold on the terms of the trust, to ensure that they’re acting in the best interest of the beneficiaries and of the trust as a whole, and that they’re discharging their fiduciary duties effectively.