Written in Partnership with Business Leadership Network
Can creditors take your Bitcoin if you or your business are sued? Just like any other asset, all forms of cryptocurrency need protection.
According to statistics which keep rising, over 46 million Americans now own Bitcoin and millions more own other cryptocurrencies sucha as Litecoin, Ethereum, Dogecoin, and many others. Despite Bitcoin’s wild swings in value and turmoil over its unsustainable energy usage, Tim Draper, a Bitcoin investor and billionaire venture capitalist, continues to assert his prediction that the price of Bitcoin will peak at $250,000 by early 2023.
California asset protection attorney and founder of Sollertis, William R. Simon, Jr., says, “If the only protection a crypto owner has thought about is keeping their wallet safe and not losing their crypto in a market downturn, it’s time to treat your crypto just like any other high-value asset. Think long-term. Think about ways to protect the wealth now and into the future.” So, if you are among these 46 million people, thinking about asset protection for cryptocurrency is a must.
Many widely believe a creditor is unable to seize cryptocurrency. The U.S. government offers some very apparent evidence that Bitcoin is not a completely anonymous online currency. In one case, the FBI traced Bitcoins from the Silk Road anonymous drug marketplace directly to Ross Ulbricht, the 30-year-old man charged with operating that bazaar.
Cryptocurrency As An Asset – What Is It?
As a medium of exchange, “virtual currency” functions as a digital representation of value. i.e., you can trade or transfer it digitally and use it as a payment or investment. A virtual currency or “virtual asset” differs from traditional currencies, securities, and other financial assets by being digitally reconstructed. Therefore, many contend, virtual currency has the same value as real currency.
As digital currencies are pseudonymous or borderless, discussions of using Bitcoin for asset protection will inevitably arise. Owning cryptocurrencies seems an effective way to hide wealth since it could offer anonymity. One problem with this assumption is legitimate (and defensible) asset protection.
For security, cryptocurrencies rely on cryptography. Key characteristics of cryptocurrency include:
- They are decentralized—they lack a central bank to issue currency and maintain payment ledgers.
- The technology relies on complex algorithms and a distributed ledger referred to as the “blockchain.”
- It is a system of peer-to-peer payments and receipts maintained by a network of users.
How Creditors Can Gain Access and Take Your Cryptocurrency?
A California law opened the door to the purchase of goods and services using virtual currency. On June 29, 2014, Governor Jerry Brown signed Assembly Bill No. 129 into law, repealing a California law prohibiting anything circulating as money other than the lawful money of the United States. The California Department of Business Oversight appears to be considering the regulation of virtual currency companies.
If you lose a lawsuit or fall into debt, a court will require you to provide your entire financial history, including purchases and sales of cryptocurrency. From a legal standpoint, asset protection attorney William R. Simon, Jr. says “the anonymous nature of blockchain transactions is irrelevant; you must disclose everything under penalty of perjury. The work we do with asset protection clients aims to ensure our clients take steps now to protect against any claims in the future.” A seizure of financial assets will almost certainly include any crypto assets.
Upon examination by a creditor, if you do not disclose your crypto assets, you can be found guilty of a felony and incarcerated. Likewise, the federal government is now requiring you to disclose your crypto currencies on your tax returns and if you fail to make this disclosure, you will be similarly subjecting yourself to risk of incarceration.
The government has turned more attention to crypto in the past few years. Investing in crypto to avoid taxes or evading liabilities is no longer the landscape. It is possible to protect your crypto from future creditors using legitimate asset protection measures. The steps are legal, if done correctly and timely, and can offer far more and better protection than an underhanded approach could ever offer.
How To Legally Protect Your Crypto Assets
The U.S. government has determined that cryptocurrency is “property” and shall be treated as such for the purpose of federal income tax, and some foreign governments are now accepting Bitcoin as legal tender within their borders, strongly suggesting that crypto is here to stay. The wise choice is to protect what crypto you have and put it to work, as one would with any investment.
Sollertis is one law firm in California already helping their clients protect assets, including cryptocurrency. Trusts, both domestic and offshore, are useful when combined with other legal strategies to protect wealth today for what may happen tomorrow. There is no one-size-fits-all solution when it comes to trust laws, legal and financial strategies, or planning for the various tax implications.
Unlawful Transfer
Timing plays a significant role. A legitimate asset protection strategy involves analyzing potential future claims and taking steps to prepare accordingly. Uninformed cryptocurrency owners who seek protection after defaulting on a debt, or facing a lawsuit, or going through a divorce often miss this point completely.
Courts have the power to unwind reactionary transfers or transfers made intending to avoid a creditor as “fraudulent transfers.” Implementing an asset protection strategy must begin before creditor claims form for maximum protection.
Essential to adequate asset protection is transparency. A lawsuit and a resulting money judgment will require you to provide information about all your assets, such as bank accounts, investments, and real and personal property ownership.
This would apply to digital currencies as well. There would not be a predetermined time frame for the investigation. Identifying possible fraudulent transfers is typical of a creditor’s lawyer, who analyzes account histories and title chains before a lawsuit and scrutinizes transfers made subsequently.
Crypto transactions have timestamps, so if you need to prove the timing of your transfers to be legitimate, this can provide easy proof of when assets were moved.
Protect Your Cryptocurrency Before It’s too Late
Crypto investors, including their property rights, are becoming increasingly important to legislators and policymakers. There are several blockchain legislations in place and others brewing at this moment. The Uniform Law Commission has proposed an amendment to the Uniform Commercial Code (UCC) in the United States. The State of Wyoming has led the way with specific blockchain laws. Coins which were based on BIP39 keys .
In Europe, Liechtenstein and France have already passed special rules pertaining to blockchain policy. The United Kingdom has taken an alternative approach: a government commission produced a document to illustrate that the common law already recognizes that crypto assets are property.
The legal initiatives are welcome to some extent. They significantly expand the potential for innovations in digital ledger technology as a part of financial services. As well as enhancing legal certainty, they provide a secure framework, which is essential in protecting investors.
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