Trusts and the issues around digital assets

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 that the sector is embraced by the 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.

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 structure as a form of asset protection, or for estate planning purposes, or are asking trustees to consider investing in digital assets. 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 familiarise themselves with a range of topics, including how digital assets function, how they’re acquired, how they must be managed and how they can be distributed to beneficiaries of a trust.

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.

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. 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 digital asset is identifiable and has the ability to be transferred, a trustee does have the power to hold it.

In spite of the understanding of what digital assets are, the key question is what constitutes “property”. The dictionary 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.

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 consider 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 evidence the effective exercise of their fiduciary duties as trustees and to protect investors from any undue misfortune.

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 are exercised solely at the discretion of the managing trustee in order to mitigate the non-managing trustee’s liability.

In any event, trustees will need to be mindful of the regulatory and tax implications surrounding digital assets, taking into consideration the fundamental principle stated by the House of Lords 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 scrutinise 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.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer