In recent years, the world of digital assets has experienced unprecedented growth and recognition. As a result, there is a pressing need for robust legal frameworks to regulate the ownership, transfer, and protection of these assets. As Director of Private Clients in Singapore, Shawn Wang understands the importance of selecting the right legal structure to hold digital assets in consideration of an individual's objectives, risk tolerance, and tax implications. In this article, he delves into the crucial factors to consider when choosing a legal structure for digital assets.
What are the key considerations to keep in mind when choosing a legal structure to hold digital assets?
1. Asset type
Distinctions between cryptocurrencies, non-fungible tokens (NFTs), and digital securities are each subject to varying treatment and regulatory demands. Identifying the asset type is crucial in determining the most suitable legal structure.
2. Regulatory & legal clarity
As the definition of digital assets remains widely deliberated, there are differences in its legal status across jurisdictions. Importantly, the chosen structure and jurisdiction should permit investments in digital assets.
In some jurisdictions, digital assets have been deemed property under law and are even capable of being held on trust as choices in action (e.g. Trusts in Singapore). Different structures have different limitations on choosing their corresponding governing law.
Separately, digital assets are subject to evolving and varying regulations in different jurisdictions. The chosen legal structure must ensure compliance with local and international laws, such as Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.
Although some jurisdictions may legally recognise digital assets and security offerings (including ICOs), there is presently a lack of international standardisation on the regulatory expectations, tax rules and accounting treatment of digital assets.
3. Tax implications
Taxation of digital assets is complex due to varying tax classifications and rules across jurisdictions.
The chosen legal structure, such as trusts, corporations, or partnerships, carries distinct tax implications that impact an investor’s tax liability and potential returns. Without clear international guidance, any changes to tax laws and regulations could significantly impact an investor’s potential return and tax liability.
4. Fiduciary & legal obligations
Consider the purpose and objectives of the structure.
Directors of companies exercise their powers within the boundaries of the company’s objectives outlined in its Memorandum. Actions outside these objectives, known as ultra vires, might be void according to common law principles. While some jurisdictions have abolished the ultra vires doctrine in modern company legislation, others have only partially abolished it concerning third parties acting in good faith.
On the other hand, trustees are obliged to adhere to statutory prudent investor rules in most jurisdictions. They must invest prudently and appropriately, balancing risk and return. The inherent volatility of digital assets poses challenges for the trustee, where investing in them could risk eroding the trust fund due to market volatility. Conversely, refraining from such investments might lead beneficiaries to contest missed profit opportunities.
5. Minimising risk of loss
Digital assets lack a paper trail and are not easily discoverable. Instances abound of substantial monetary losses following the demise of the investor alongside his private keys.
Structures like trusts and foundations involve a third-party professional fiduciary (i.e. the trustee and council members) to ensure proper documentation and management of digital assets. Additionally, investors can articulate their wishes and instructions in separate letters accompanying the trust deed and constitutional documents.
6. Liability & asset protection
The level of liability and asset protection is a key consideration. This is especially in consideration of the wide swings in market valuations of digital assets. Certain legal structures, like limited liability companies (LLCs), provide a shield against personal liability. This can be important when dealing with substantial digital asset portfolios.
7. Inheritance & estate planning
Estate planning is a critical aspect of holding digital assets. The chosen legal structure should facilitate the seamless transfer of assets to heirs or beneficiaries in the event of incapacitation or death. Proper legal documentation is necessary to avoid complications.
8. Long-term investment control
Given the emerging nature of digital assets, some investors strongly believe in their long-term value proposition, even beyond their own lifetime.
In such cases, opting for a trust rather than a will or corporate entity allows the Investor to provide precise directives to the trustee regarding the digital assets investments after their passing. This may include holding investments for a specific duration or until reaching a predetermined exit price, preventing premature asset sales.
If concerns arise regarding differing interests and risk tolerances among beneficiaries after the investor’s passing, establishing a foundation might be preferred. Foundations are structured to align with the founder’s (investor’s) intentions rather than solely focusing on the beneficiaries, ensuring compliance with the investor’s wishes.
9. Privacy & security concerns
Presently, digital assets and their service providers operate without regulatory oversight in most jurisdictions. The lack of regulation has led to numerous scams, identity thefts, and even extortion attempts, taking advantage of the industry’s relatively unregulated nature.
Privacy concerns arise for investors as, upon their passing, their digital assets holdings become public during the probate process in estate courts. This leads to a loss of privacy and security for the family.
To mitigate this loss of privacy, digital assets held within a trust or a foundation remain outside public records, providing a level of confidentiality and security.
10. Future scalability
As the digital asset portfolio grows or evolves, the structure should allow for flexibility and accommodate changes in asset holdings. This includes allowing for the possibility of associated crypto airdrops while maintaining the asset class's jurisdictional agnostic nature.
How can Ocorian help?
We recognise that every client is different and that individual requirements can change both in the short and long term, as personal circumstances or, indeed, the wider world changes. Our private client team build a foundation of close and trusted relationships – making sure your needs and goals are always at the centre of what we do. Contact our team today for all your digital assets queries.