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Cryptocurrencies As Legitimate Asset Protection Tools

Jun 27 2017

Article Written for: Forbes.com
Despite some misconceptions, using bitcoin or other cryptocurrencies for asset protection in connection with offshore planning may be an effective strategy. A crucial facet to using foreign trusts to protect wealth is ensuring that the trustee and trust assets remain outside of any jurisdiction where the grantor might be sued. Some U.S. states may find the concept of self-settled trusts anathema to public policy and thus choose to ignore the trust and treat the grantor/beneficiary as the de facto owner of trust assets.

Offshore limited liability companies are similarly exposed. Consider, for instance, a Florida resident who forms a Nevis, single-member LLC to shelter assets in a Florida bank account. If that individual is sued, Nevis law limits the judgment creditor’s remedy to a lien on LLC proceeds (called a “charging order”). The charging order would not entitle the creditor to take control of the LLC in Nevis. If the creditor were to sue in Florida, however, a Florida court might ignore Nevis law (as it would apply to ownership of the LLC) and permit the creditor to foreclose on the LLC interest. As the new owner, the creditor would have direct access to the LLC bank account and any other assets owned by the LLC. Farfetched? This is essentially what happened in Wells Fargo v. Barber.

As highlighted by the Barber case, effective implementation of offshore asset protection requires that assets be transferred to a safe location outside the reach of U.S. courts. Assets must also remain outside the direct control of members and beneficiaries. Courts have mechanisms, via contempt orders, to impose sanctions, fines and jail time to compel a debtor to disclose and turn over assets unless it is truly impossible for the debtor to comply. (While there are colorful examples of jailed debtors under contempt, bona fide impossibility is a valid defense.)

Digital Asset Protection

Digital assets, like cryptocurrencies, offer a way to keep assets safely away from potentially hostile U.S. courts because they exist entirely on a decentralized digital ledger known as the blockchain.

Cryptocurrency transactions are executed on the blockchain via a two-key system. The keys include an address (public) key and a secret (private) key. Think of the address as a transparent envelope. Anyone can see inside the envelope, but only the secret key can open it to access the contents. Keys are simply a sequence of numbers and letters. The secret key remains under the owner’s control and provides the ability to transfer the asset. “Transfer” is somewhat of a misnomer, as assets don’t actually move. Rather, the blockchain ledger is updated to reflect the transfer of ownership. The right to spend digital currency is granted to the holder of the secret key corresponding to the address posted in the blockchain. Additionally, an address can be created to require a combination of multiple secret keys (multiple owners) to be spent (transferred).

A critical point is that anyone with the appropriate secret key(s) can execute the transfer of the asset. Keys are often kept on a computer or mobile device, but they can also be stored on detached storage devices (such as a USB drive), a sheet of paper in a safe (referred to as “cold storage”), or even memorized (although relying on so-called “brain wallets” may not be advisable). In the most simplistic terms, using cryptocurrency in asset protection may simply involve the transfer of a private key to an offshore trustee (or manager).

Properly selected offshore trustees are unlikely to become subject to the jurisdiction of a court where a defendant may be sued. Absent jurisdictional authority, a court is powerless to compel the trustee to turn over assets. An added benefit is that blockchains are decentralized. This means they are not subject to any central authority (such as a bank or other financial institution) that might be legally compelled to provide a court with access or control over assets in its possession. Without the complete private key, no court or legal authority can manipulate ownership of a blockchain asset.

Worries about a rogue trustee or manager can be allayed by requiring multiple keys, such that two (or more) parties are required for access. Those parties could be co-trustees, a trustee and trust protector, co-managers, or a manager and member of a board of directors. A trustee acting alone would have no ability to unilaterally access that portion of trust assets requiring multiple keys. Cryptocurrency assets could also be divided, such that a small portion of currency remains under a single trustee’s control whereas a larger portion is restricted and remains in cold storage subject to joint-key access.

Because cryptocurrency transactions are semi-transparent and are time-stamped on the blockchain, ready proof is available to legitimize the timing and propriety of protective transfers. Transfers made well before assertion of a claim are far less likely to be challenged by creditors and courts. Such proof and transparency may be particularly useful when facing the threat of a contempt order, as mentioned above.

The Future Of Digital Currency

Additionally, unique potential exists for digital currencies as programmable money. It is not beyond the realm of possibility that digital currencies may one day be programmed to respond to pre-defined duress situations and to execute certain functions in the form of so-called “smart contracts.” For instance, assets under control of a trustee who reports being summoned to appear in a hostile court might be programmed to immediately transfer to a successor trustee. Similarly, a trustee who fails to account to beneficiaries at pre-designated times might be effectively removed in a similar fashion by self-executing currency. As the technology develops and becomes more refined, smart contracts and the concept of programmable money will inevitably be integrated into asset protection planning.

 The possibilities are utterly astonishing and as these financial technologies further evolve, so will additional use cases. This is just the very tip of the asset protection iceberg. Even now, cryptocurrencies, with their unique digital properties, transparency and decentralization, offer exciting, leading-edge opportunities as effective and legitimate modern asset protection tools.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

 

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Eric C. Boughman

Eric also volunteers as a Guardian ad Litem with the Orange County Legal Aid Society. He is rated AV – Preeminent by Martindale-Hubbell and regularly publishes articles and makes presentations in the areas of asset protection and real estate law.

We cater to the professional, entrepreneur and investor seeking customized domestic and international asset protection strategies.

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