With cryptoassets becoming more widely used, paraplanners will need to consider how they sit within trusts. Amy Harvey, Of Counsel and Amalia Neenan, Trainee Solicitor at Peters & Peters LLP, look at the implications and practicalities involved
Amy Harvey
Amalia Neenan
Talk of cryptoassets is everywhere. To some they may be the Emperor’s New Clothes but, given their ongoing prevalence, it is increasingly likely that trustees will be asked to consider investment in cryptoassets and that they will need to manage them as part of an ongoing or new trust structure.
With strategic forward planning, prudent trustees can minimise some of the risks most commonly associated with cryptoassets – chiefly, product volatility and fraud.
Ups and Downs
Product volatility is a key risk that should be factored into any economic strategy pertaining to a trust, prior to the purchase of cryptoassets. To illustrate, one Bitcoin, was worth $61,374.28 US dollars in October 2021. Comparatively, as of 24 January 2022, this has slumped to $36,285.93 US dollars. During the period of January 2018 to June 2019, these price spikes and dips resulted in a value fluctuation that was six times higher than that of fiat currencies and gold.
How then can trustees pre-empt what is seemingly unpredictable? To mitigate the fallout from any price jumps and limit potential allegations of trust mismanagement, it is advisable that trustees employ the powers preserved in specific clauses that can be drafted into the trust deed. Anti-Bartlett clauses can be useful. These clauses, derived from the English High Court ruling in Bartlett v Barclays Bank Trust Co. Ltd (No.1 and No.2) (1980), and recently reaffirmed by the Hong Kong Court of Final Appeal in Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others (2019), offer safeguards for trustees. These clauses are likely to be used where cryptoassets have been obtained by a company held under the trust structure, instead of being obtained by the trustee directly. Here, anti-Bartlett clauses counteract a trustee’s duty to manage the company held by the trust or to supervise its dealings. This allows a trustee to distance and protect themselves from either the success or failure of the relevant purchased cryptoassets.
Further distance can be sought through Reserved Powers Trusts. Here, trust settlors can either retain for themselves, or delegate to a third-party such as a protector, certain powers of control, limiting a trustee’s liability. For instance, settlors can retain or delegate the power of investment. Trustees will therefore not be responsible for decisions concerning the acquisition or sale of cryptoassets, if so specified. Any losses or gains will not be the responsibility of the trustee.
Risky Business
Nevertheless, despite drafting mechanisms offering some protection to trustees, the risk of cryptoasset fraud still prevails. Cryptoassets are increasingly subject to fraudulent attacks and misappropriation. This is compounded by the decentralised nature of the blockchain and the relative anonymity of transactions, which creates identification barriers to tracing stolen funds. Risk will never be fully eliminated from crypto-dealings. However, recent caselaw has attempted to answer this problem.
The 2019 UK Jurisdiction Taskforce’s Legal Statement confirmed that under English law, cryptoassets are to be treated as property. The recent High Court decision in Zi Wang v Graham Darby (2021) also held that cryptoassets could be held on trust. As a result, English courts are able to use the existing tools they employ when dealing with the theft of fiat funds, in cases of crypto-criminality.
AA v Persons Unknown (2019) was the first case to uphold the Legal Statement’s position that cryptoassets are property. Consequently, a proprietary injunction was granted against coins that had been traced (using tracking software that follows key transactions on the blockchain) to a wallet held on an exchange. Not only this, but disclosure orders were successfully sought against the custodians of the crypto-exchange, to provide information on the identities of the wallet holders in question.
A more extensive arsenal of legal weaponry was deployed in Ion Science Ltd v Persons Unknown and others (2020) where the court granted a range of remedies including worldwide freezing orders, to protect the assets from disappearing. Ancillary disclosure orders against persons unknown and the parent companies of two crypto-exchanges were also sought – gathering identification information about the fraudsters. Zi Wang (2021), as mentioned above, also demonstrates the ease at which the English courts can utilise legal remedies to curtail crypto-frauds, with that case serving as another example of the court granting (and then extending) a worldwide freezing order against disputed cryptoassets.
The courts of England and Wales have therefore made meaningful strides in utilising adaptable tools to tackle crypto-frauds. By specifically targeting crypto-exchanges to provide identification information for suspicious wallet holders, and utilising key devices such as freezing orders and proprietary injunctions, stolen cryptoassets can be traced and secured.
Although cryptoassets pose understandable risks, trustees can navigate potential pitfalls and proceed with greater confidence through exercising due diligence, seeking legal advice where necessary and acting promptly if there are any concerns about fraud.
Advisers should also ensure the scope of their duties is carefully drafted into the underlying trust deed, to both allow investment into cryptoassets and exclude or limit certain obligations or liabilities.
