Key considerations for Guernsey trustees when dealing with cryptoassets

The world of cryptoassets continue to evolve at a breathtaking pace, with cryptocurrencies such as Bitcoin and Ether reaching unprecedented heights and capturing the attention of HNWIs. Recent surges in the value of these assets have been fuelled not only by market dynamics but also by significant political and legislative developments in the United States of America (US). The election of President Donald Trump, a vocal supporter and investor in cryptocurrency, has coincided with a sharp rise in Bitcoin’s price, which recently soared past US $110,000 for the first time. Meanwhile, the advancement of the GENIUS Act in the US Senate signals a move towards greater regulatory clarity for cryptocurrencies, particularly stablecoins, potentially paving the way for their mainstream adoption.

These developments are unfolding amid a period of global economic uncertainty, leading many HNWIs to look beyond traditional investments in search of alternative stores of value. As cryptoassets become more deeply embedded within the financial system, professional trustees are facing increasing demands to manage cryptoassets in a manner that serves the best interests of beneficiaries.

However, this asset class presents trustees and their advisers with a unique set of risks that differ markedly from those associated with conventional investments such as real estate, art, bullion, stocks, bonds or ETFs. Cryptoassets are subject to extreme price volatility, heightened cyber security threats and the ever-present dangers of fraud, scams and hacking. These factors require a fundamentally different approach to risk assessment and management.

This raises a critical question: how can trustees administer such a high-risk asset class while still fulfilling their general fiduciary duty to “…observe the utmost good faith and act en bon pére de famille” and their statutory duty to “subject to the terms of the trust and to the provisions of this Law […] (b) preserve and enhance, so far as is reasonable, the value of the trust property.”?¹

This is not an academic point - failure to satisfy these duties can result in a breach of trust, exposing trustees to personal liability for any resulting losses. It is therefore essential that trustees develop a thorough understanding of the cryptoasset landscape and the specific risks it entails.

This article highlights several key considerations for trustees when dealing with cryptoassets:

Understand different types of cryptoassets

Not all cryptoassets carry the same level of risk. Trustees should carefully evaluate the nature of any cryptoassets proposed for settlement into a trust. Well-established cryptocurrencies with large market capitalisations and strong reputations, such as Bitcoin or Ethereum, may be considered less risky than more speculative assets like NFTs and Memecoins promoted on social media. Furthermore, cryptoassets held indirectly through regulated funds or publicly traded entities generally present lower risks than those held directly under trust, as professional managers assume responsibility for portfolio management.

Trust structure

Depending on the client’s objectives and subject to appropriate regulatory and tax advice, trustees might consider establishing a trust with an underlying company to hold cryptoassets. This structure can allow for the segregation of cryptoassets from other trust property and may involve holding the assets at company level, possibly in a separate entity. Trustees may also wish to avoid providing directorship services for such companies. 

Risk mitigation

The above approach enables the implementation of various risk mitigation strategies, including:

1. Allocation of investment powers

Establishing clear lines of responsibility for investment decisions is an effective way for trustees to manage risk when holding cryptoassets in a trust. By assigning these investment powers to the settlor, protector or another designated "power holder", the responsibility for making appropriate investment decisions - such as buying, selling or retaining cryptoassets - rests with that person. As a result, if an investment decision leads to a loss in the trust fund, the trustees should be protected from liability.

2. Use of third-party custodians

The safekeeping of cryptoassets presents unique challenges. Engaging reputable third-party custodians can help mitigate risks related to theft and cyber security breaches. Where a third-party custodian is appointed, responsibility for the security of the cryptoassets rests with them. The power to select and appoint custodians should also be reserved for the settlor, protector or another designated "power holder". This means that if the appointed custodian becomes insolvent or there is a security breach resulting in the loss of cryptoassets, the trustee will not be held responsible for the selection or appointment of that custodian.

3. Anti-Bartlett

It is crucial that the trust instrument includes a robust "Anti-Bartlett" clause, which limits the trustees’ duty to interfere in the management and conduct of any underlying company holding cryptoassets. This reduces the trustees’ exposure to risks arising from the day-to-day management of these assets, particularly, where the company invests in cryptoassets which diminish in value or fail completely.

However, trustees should ensure they are provided with adequate information from the underlying company regarding its overall operations and the state and amount of its cryptoasset portfolio, so that they can maintain an appropriate level of oversight.

4. Robust indemnity provisions

The significance of having strong and comprehensive exoneration and indemnity clauses in the trust instrument cannot be overstated. Trustees act in their personal capacities and, in some situations, may be personally liable for liabilities arising from their role. Provided that trustees have acted within their powers and were not in breach of trust or infringed any statutory provision, they are generally entitled to call upon the trust assets to cover such liabilities. However, there may be situations where the trust fund is insufficient to meet these liabilities, or where trustees are not entitled to be indemnified from the trust fund at all. In these cases, trustees should ensure that they have a robust indemnity in place, so that they can be adequately compensated, for example, when transferring trusteeship or distributing assets to beneficiaries.

5. Exit strategy

The trust instrument should include provisions allowing trustees to withdraw from the trust relationship in situations where, for example, continued involvement with the trust relationship would expose them to an unacceptably high reputational risk, or if the risk tolerance of their business changes over time. Trustees should have clear powers to resign or retire, as well as the power to appoint a replacement trustee.

Conclusion

As the digital economy becomes increasingly mainstream, trustees and wealth advisers will likely need to address cryptoassets as a separate asset class, which brings its own unique challenges and risks. What is clear is that they cannot be treated the same as traditional assets and trustees and HNWIs will need to ensure suitable provisions are put in place to mitigate against these risks. Although not intended to be comprehensive or prescriptive, the points above highlight some of the key issues to consider and outline questions trustees may find useful to ask themselves when managing cryptoassets, particularly in relation to risk mitigation.

_{[1] Section 22 and 23 of The Trusts (Guernsey) Law, 2007}